Financial Management

A Report on Venture Capital in India

Report Submitted On: 06/02/2009

 PREFACE

In India, major investment are being made in the knowledge based industry with substantially low
investments in land, building, plant and machinery. The asset/collateral-backed lending instruments
adopted for the hard for the hard core manufacturing industries, are providing to be inadequate for the
knowledge-based industries that very often start with just an idea.

The only way to finance such industries through Ventue capital. Venture capital is instrumental in
bringing about industrial development, for it exploits the vast and untapped potentialities and promotes
the growth of the knowledge- based industries worldwide.

In India too, it has become popular in different parts of the country. Thus, the role of venture capitalist is
very crucial, different, and distinguishable to the role of traditional finance as it deals with others money.
In view of the globalization; Venture capital has turned out to be a boon to both business and industry.
There is , thus, an intense need to be exploit to the maximum its potential as a new means.

This report deals with the concept of Venture capital, with particular reference to India. The report
includes all facts, rules and regulations regarding Venture capital and is written in very comprehensive
manner.

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 EXECUTIVE SUMMARY

This report, which contains in depth study of Venture capital Industry in India, is made with an intension
to get through all the aspects relate to the topic and to become able to make some suggestion at the
industry.

Future of any economy depends on the success of the new technologies and industries and services
supporting these technologies. In India, where human, particularly technical and entrepreneurial are
abundant and there is shortfall of capital, venture capital has a greater significance. It is observed the new
companies, particularly the smaller ones, create more jobs. Venture capital helps employment generation
particularly for educated and skilled workers.

The financing of domestically developed technologies in general and those developed by the new
generation of entrepreneur has always been a problem in both developed and developing countries. This is
because domestically developed technologies, either by organized sector or the unorganized sector, are
usually perceived to be uncertain by the conventional financial system. In India, since independence, a
number of financial institutions have emerged to cater to the needs of the industrial entrepreneurs and
these have mainly remained as debt providing organizations. In India, risk finance has always been in
short supply.

The initial equity for any venture has to be raised by the promoters from their own sources and public
financial institutions are not of much help. To overcome this problem venture capital financing made a
small beginning in India since 1988.

Venture capitalists have been catalytic in bringing forth technological innovation in USA. ASIMOLAR
ACT CAN ALSO BE PERFORMED IN India. As venture capital has good scope in India for three
reasons:

First: The abundance of talent is available in the country. The low cost high quality Indian workforce that
has helped the computer user‘s world wide in Y2K project is demonstrated asset.

Second: A good number of successful Indian entrepreneurs in SILICON valley should have a
demonstration effect for venture capitalists to invest in Indian talent at home.

Third: The opening up of Indian economy and its integration with the world economy is providing a
wide variety of niche market for Indian entrepreneurs to grow and prove themselves.

The topic concentrates on the provision of permanent or equity type capitals i.e. venture capital. In the
broad terms, venture capital means long term risk equity finance where the primary reward for its
provider is eventual capital gain and not the interest/ dividend yield.

India is on the threshold of a high technology revolution and new entrepreneurial growth. Slow growth of
significant institutional set up to provide much needed venture capital has hampered the growth of the
economy. A radial change in the existing framework of venture capital financing in India is a must to
achieve high economic growth.
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 TABLE OF CONTENT

SR NO PARTICULARS PAGE
NO
1 Introduction of the subject 6
1.1 Research objective 7
1.2 Limitations of project 7
1.3 Methodology used 7
1.4 Scope 7
2 Introduction to Venture Capital 8
3 Venture capital Investment process 10
3.1 Factors influencing Venture Capitalists choice of 12
investment
4 Different types of venture capital investment 13
4.1 Early stage finance 14
4.2 Later stage finance 16
5 Venture capital fund regulations 24
5.1 Central Government Guidelines 25
5.2 Regulation by SEBI 26
5.3 Central Board of Direct Taxes 28
5.4 Regulation of Foreign Venture Capital Funds 31
5.5 SEBI-Foreign Venture Capital Investor- Regulations, 32
2000
5.6 Self Regulation by IVCA 34
5.7 Structuring of Venture Capital in India 35
5.8 Limitations of Structuring of Venture Capital in India 37
6 Alternatives to VC funding 40

6.1 Fund from operations 41

6.2 Interested partners: 41

6.3 Fund it yourself 41

6.4 Debt financing 41
6.5 Friends, family and angels 41
6.6 Comparing the alternatives 41
7 Venture Capital Operations in India 42
7.1 Factors Influencing Venture Capitalists Choice of 43
Investment
7.2 Structuring A Deal 49
7.3 Financing Instruments 49
7.4 Monitoring 50
7.5 Some of venture capital organisations 50
7.6 Where are VC’s Investing In India? 51
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8 Current trends in India 52
8.1 Growth of VC in India 53
8.2 No. of venture Firms in India 54
8.3 Top Venture Capital Investments 55
8.4 Investment Pattern 55
8.5 Effect of globalisation 56
8.6 Emerging sectors 57
8.7 Threat from substitutes 58
8.8 Indian scenario 2007 61
9 Exit Route 62
9.1 Buy Back I Shares Repurchase 64
9.2 Sale On Shares On The Stock Exchange 65
9.3 Initial Public Offer (IPO) Offer For Sale 66
9.4 Corporate I Trade Sale 68
9.5 Selling To A New Investor 70
9.6 Pre-Requite For The Efficient Exit Mechanism 71
10 Advantages of VC over other forms of finance: 73
10.1 Disadvantages 74
11 Threats 75
12 Case Studies on VC 77

12.1 Successful External Venture Investment by Nortel 78

12.2 Tejas Networks India Pvt. Ltd. 78
12.3 Strand Genomics 80
12.4 Avesthagen 82
12.5 Ittiam Systems 84
12.6 Mindtree Consulting Pvt. Ltd 85
12.7 Network Solutions 88
12.8 REVA The Electric Car Company 89
12.9 Observations Of The Case Studies 93
13 Contemporary Issue in Venture Capital Industry 97
Conclusion 99
Bibliography 100

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 Chapter1

Introduction of the Subject

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1.1 Research objective:

 To understand concept of venture capital

 To understand venture capital investment process in India
 To study the evolution and need of venture capital industry in India
 To understand legal framework formulated by SEBI and income tax department
 To understand the rules and regulations for Foreign players investing in Venture capital in India
To find out opportunity and threats those hinder and encourage venture capital industry in Indian.

1.2 Limitations of project:

A study of this type cannot be without limitations. It has been observed that venture capitals are very
secretive about their performance as well as about their investments. This attitude has been a major hurdle
in data collection. However venture capital funds/companies that are members of India venture capital
association are included in the study. Financial analysis has been restricted by and large to members of
IVCA.

1.3 Methodology used:

In India neither venture capital theory has been developed nor are there many comprehensive books on
the subject. Even the number of research papers available is very limited. The research design used is
descriptive in nature. ( The attempt has been made to collect maximum facts and figures available on the
availability of venture capital in India, nature of assistance grated, future projected demand for this
financing, analysis of the problems faced by the entrepreneurs in getting venture capital, analysis of the
venture capitalists and social and environmental impact on the existing framework.)

The research is based secondary data collected from the published material. The data was also collected
from the publications.

1.4 Scope:

The scope of the research includes all type of venture capital firms whether setup as accompany or a trust
fund. Venture capital companies and funds irrespective of the fact that they are registered with SEBI of
India or not are part of this study. Angel investors have kept out of the study as it was not feasible to
collect authenticated information about them.

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 Chapter2

Introduction to Venture Capital

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 2. Introduction to Venture Capital
Venture capital financing is commonly associated with provision of equity investment for a time period in
small/medium business with high growth potential and high reward but which could entail high risk.
Simply stated, Venture Capital (VC) is high-risk, high-return investing in support of business creation and
growth. It is money provided, often by professionals, who invest alongside innovative entrepreneurs in
young, rapidly growing companies that have a reasonable, though not assured, potential to develop into
significantly profitable ventures. Naturally, venture capital financing is very different from traditional
sources of investing such as lending and borrowing, developmental financing or stock market investing.
Venture capital financing fills a void left by the traditional financial institutions in high risk, high
potential and innovative ventures.

Origin
The concept of venture capital originated in USA during 19th. And early 20th. Century.
European investors along with American natives were involved in backing construction and other
new industries viz. Rail, Road, Steel, Oil, Gas and Glass.

VC Specialization

The state of development of Investee Company decided the financing stage as perceived by the
venture capitalist.
The funds investments size range i.e. minimum/maximum equity percentages also vary from
fund to fund.
VC funds includes many financing instruments i.e. Shares, Preferred Shares, deferred shares,
convertible loan stock.
Venture capitalist specializes in specific technology and their portfolio includes a significant
proportion of business in the areas of advanced technology.
Time scale to realization i.e. early stage financing are inevitably taking a medium to
Long-term (5-7 years) and later stage financing will have a 3-5 years time scale.
Geographical Limitations i.e. funds say also specialize regionally.

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 Chapter 3

VC Investment Process

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3. VC Investment Process
Venture Capital Investment Process is different from normal project financing. In order to understand the
investment process a review of the available literature on venture capital financing is carried out. Tyebjee
and Bruno in 1984 gave a model of venture capital investment activity which with some variations is
commonly used presently. As per Tyebjee and Bruno venture capital activity is a five step
Process as follows:
1. Deal Organization
2. Screening
3. Evaluation or Due Diligence
4. Deal Structuring
5. Post Investment Activity and Exit

Deal Organization
It means sourcing or locating venture capital proposals. Deals can originate from different
sources. Most common is their being referred to venture capital funds by their parent or sister
organizations, industry associations, consultants and past clients

Preliminary Screening
Instead of evaluating all the proposals received by the venture capitalist, which is a time
consuming and costly preposition, the deals are first put through a screening process. Only the
proposals passing the screening test are considered for evaluation. This saves the time and cost of
the venture capitalist. Each venture capitalist has its own broad criteria for such screening that
limit the projects to selected areas in terms of industry sector, technology, product, stage of
financing, size of venture / investment, regional preferences etc.

Evaluation or due Diligence

The proposals that have successfully passed through screening process are subjected to detailed
evaluation. This process is called Due Diligence. Most of the ventures coming to venture
capitalist are new ventures being setup by first time promoters, neither the ventures have any
track record nor the entrepreneurs any operating experience. Hence the normal evaluation criteria
used for project financing by financial institutions are not of much use. The venture capitalist, to a
large extent depends upon his subjective judgment. The exact nature of evaluation differs with the
stage of financing. Most of the times venture capitalists evaluate the promoters for his managerial
abilities and entrepreneurial qualities. Where possible, the product characteristics and market
potential are also evaluated. Evaluation is based upon the business plan provided by the
entrepreneurs.

Deal structuring
When the proposal passes through due diligence and is accepted by the venture capitalist. The
exact terms of the investment are negotiated between the venture capitalist and investee company.
The process is called Deal Structuring. The term includes the amount, form and price of the
investment.

Post investment activity and exit

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 After the terms of assistance are finalized, venture capitalist becomes the partner and collaborator
and is involved in development and growth of the investee company. Different venture capitalists
have different ways of monitoring the progress of the investee company. The venture capitalists,
as and when required, give directives for proper financial and marketing management and in case
of managerial crises, venture capitalists go to the extent of changing the management team.
Venture capitalists aim at long term capital gain. They plan to en-cash their investments within 5
to 8 years depending upon their policy, the state of economy and stage of financing.

3.1 Factors influencing Venture Capitalists choice of investment

Track record of promoters and the management team
Nature of the business and the promoters experience in the proposed or related business
Business should meet the investment objectives in terms of risk and return
Marketing strategy
Technology and technology collaboration

A detailed and well organized business plan is the only way to gain a venture capitalist attention and
obtain funding. The detailed proposal must cover the following issues:
 Business and its future
 Management
 Financing
 Risk factors
 Analysis of operations and projections
 Product specifications

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 Chapter 4

Different types of venture capital

investments

13
4.Different types of venture capital investments

4.1 Early Stage Finance

Seed Capital

Startup capital

Early stage capital

Later stage capital

4.2 Later Stage finance

 Expansion stage capital

 Replacement Finance

 Management Buy out and buy ins

 Turnarounds

 Bridge Finance

Not all business firms pass through each of these stages in a sequential manner. For
instance seed capital is normally not required by service based ventures. It applies largely to
manufacturing or research based activities. Similarly second stage finance does not always follow
early stage finance.

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 The table below shows risk perception and time orientation for different stages of venture capital
financing

Financing Period (funds Risk perception Activity to be financed

Stage locked in
years)

Early stage 7-10 Extreme For supporting a concept

finance or idea or R&D for
product development
Seed

Start up 5-9 Very high Initializing operations or

developing prototypes

First Stage 3-7 High Start commercial

production and marketing

Second 3-5 Sufficiently high Expand market &

Stage growing working capital
need

Later stage 1-3 Medium Market expansion,

finance acquisition & product
development for profit
making company

Buy out-in 1-3 Medium Acquisition financing

Turnaround 3-5 Medium to high Turning around a sick

company

Mezzanine 1-3 Low Facilitating public issue

4.1 Early Stage Finance

 Seed Capital

Definition: The Company has a concept or product under development, but is probably not fully
operational. Usually, the company has been in existence for less than 18 months.

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Differences between Seed Capital Schemes and Venture Capital Scheme
Sr. No. Seed Capital Venture Capital
scheme Scheme

1 Basis Income or aid Commercial viability

2 Beneficiaries Very small Medium and large

entrepreneurs entrepreneurs are also
covered

3 Size of assistance Rs.15 Lakhs Up to 40% of

promoters equity
( Max)

4 Appraisal process Normal Skilled and specialized

5 Estimates returns 20% 30 % Plus

6 Flexibility Nil Highly flexible

7 Value addition Nil Multiple ways

8 Exit option Sell back to Several including

promoters Public offer

9 Funding sources Owner funds Outside contribution

allowed

10 Syndication Not done Possible

11 Tax concession Nil Exempted

12 Success rate Not good Very satisfactory

The characteristics of the seed capital may be enumerated as follows.

i. Absence of ready product market.

ii. Absence of complete management team.

iii. Product / process still in R & D stage.

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 iv. Initial period / licensing stage of technology transfer. Broadly speaking seed capital investment
may take 7 to 10 years to achieve realization.

It is the earliest and therefore riskiest stage of Venture capital investment. The new technology and
innovations being attempted have equal chance of success and failure. Such projects, particularly
hi-tech. projects sink a lot of cash and need a strong financial support for their adaptation,
commencement and eventual success. However, while the earliest stage of financing is fraught
with risk, it also provides an opportunity for acquiring bargain and thus provides greater potential
for realizing significant capital gains in long term. Typically seed enterprises lack asset base or
track record to obtain finance from conventional sources and are largely dependent upon
entrepreneur‘s personal resources. Seed capital is provided after being satisfied that the
entrepreneur has used up his own resources and carried out his idea to a stage of acceptance and
has initiated research. The asset underlying the seed capital is often technology or an idea as
opposed to human assets (a good management team) so often sought by venture capitalists.

Volume of Investment Activity

It has been observed that Venture capitalists seldom make seed capital investments and these are
relatively small by comparison to other forms of venture finance. The absence of interest in
providing a significant amount of seed capital can be attributed to the following three factors: -

a) Seed capital projects by their very nature require a relatively small amount of capital. The success
or failure of an individual seed capital investment will have little impact on the performance of all
but the smallest venture capitalist‘s portfolio. Larger venture capitalists avoid seed capital
investments. This is because the small investments are seen to be cost inefficient in terms of time
required to analyze, structure and manage them.

b) The time horizon to realization for most seed capital investments is typically 7-10 years which is
longer than all but most long-term oriented investors will desire.

c) The risk of product and technology obsolescence increases as the time to realization is extended.
These types of obsolescence are particularly likely to occur with high technology investments
particularly in the fields related to Information Technology.

Conclusion

A small amount of capital provided to an entrepreneur, usually for product development, beta stage
development, pilot project, etc., not covering launch expenses, commercial production, or marketing
is Seed Capital. The principal conclusion is that while opportunity for profitable seed capital
investment may exist, in practice venture capitalist tends to apply high discount rate against
investment proposals at this stage because of:

1) Difficulty in evaluating the viability of seed capital projects

2) Changes in technology becoming obsolete while the product is at prototype stage
3) Commercial failure due to high product cost or unacceptability by consumers. Hence venture
capitalists look for following attributes while considering a seed capital project.
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 •Project management skills of the entrepreneurs
•Technical competence on the part of investors
•A very long horizon for investment
• Ability of venture capitalist to work with scientists and technologists as opposed to managers.
The time required for analysis, time to realisation and risk inherent in seed capital investment makes
it unattractive to most venture capital firms.

 Startup capital
It is the stage 2 in the venture capital cycle and is distinguishable from seed capital investments. An
entrepreneur often needs finance when the business is just starting. The start up stage involves starting
a new business. Here in the entrepreneur has moved closer towards establishment of a going concern.
Here in the business concept has been fully investigated and the business risk now becomes that of
turning the concept into product. Start up capital is defined as ―Capital needed to finance the product
development, initial marketing and establishment of product facility.‖

The characteristics of start-up capital are:

I. Establishment of company or business. The company is either being organised or is established

recently. New business activity could be based on experts, experience or a spin-off from R & D.

ii. Establishment of most but not all the members of the team. The skills and fitness to the job and
situation of the entrepreneur‘s team is an important factor for start up finance.

iii. Development of business plan or idea. The business plan should be fully developed yet the
acceptability of the product by the market is uncertain. The company has not yet started trading.

In the start up preposition venture capitalists‘ investment criteria shifts from idea to people involved in the
venture and the market opportunity. Before committing any finance at this stage, Venture capitalist
however, assess the managerial ability and the capacity of the entrepreneur, besides the skills, suitability
and competence of the managerial team are also evaluated. If required they supply managerial skills and
supervision for implementation. The time horizon for start up capital will be typically 6 or 8 years. Failure
rate for start up is 2 out of 3. Start up needs funds by way of both first round investment and subsequent
follow-up investments. The risk tends to be lower relative to seed capital situation. The risk is controlled
by initially investing a smaller amount of capital in start-ups. The decision on additional financing is
based upon the successful performance of the company. However, the term to realization of a start up
investment remains longer than the term of finance normally provided by the majority of financial
institutions. Longer time scale for using exit route demands continued watch on start up projects.
Despite potential for specular returns most venture firms avoid investing in start-ups. One reason for the
paucity of start up financing may be high discount rate that venture capitalist applies to venture proposals
at this level of risk and maturity. They often prefer to spread their risk by sharing the financing. Thus
syndicates of investors often participate in start up finance.

Early stage capital

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Definition: The company‘s product or service is in testing or pilot production. In some cases, the product may be
commercially available. The company may or may not be generating revenues. Usually, the company has been in
business for less than three years.

Early Stage Finance, also called first stage capital is provided to entrepreneur who has a proven product,
to start commercial production and marketing, not covering market expansion, de-risking and acquisition
costs.
At this stage the company passes into early success stage of its life cycle. A proven management team is
put into this stage, a product is established and an identifiable market is being targeted. British Venture
Capital Association has vividly defined early stage finance as ―Finance provided to companies that have
completed the product development stage and require further funds to initiate commercial manufacturing
and sales but may not be generating profits.‖

The characteristics of early stage finance may be: -

i. Little or no sales revenue.
ii. Cash flow and profit still negative.
iii. A small but enthusiastic management team which consists of people with technical and specialist
background and with little experience in the management of growing business.
iv. Short term prospective for dramatic growth in revenue and profits.

The early stage finance usually takes 4 to 6 years time horizon to realization. An early stage finance is the
earliest in which two of the fundamentals of business are in place i.e. fully assembled management team
and a marketable product. A company may need this round of finance because of any of the following
reasons: -
Project overruns on product development.
Initial loss after start up phase.
The firm needs additional equity funds, which are
not available from other sources thus prompting venture capitalist who, have financed the start up
stage to provide further financing. The management risk is shifted from factors internal to the firm
(lack of management, lack of product etc.) to factors external to the firm (competitive pressures, in
sufficient will of financial institutions to provide adequate capital, risk of product obsolescence etc.).

The following risks are normally associated to firms at this stage: -

a) The early stage firms may have drawn the attention of and incurred the challenge of a larger
competition.
b) There is a risk of product obsolescence. This is more so when the firm is involved in high- tech.
business like computer, information technology etc.
Conclusion

The absence of either profits or positive cash flows continue to make early stage investment too risky.
However the existence of a product and a management team considerably reduces the fundamental risk
facing the equity investor. Generally, the shorter time horizon and decreased fundamental risk associated
with early stage firm makes them more attractive as venture investments than either seed capital or start
up situations.

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 Later stage capital
Definition: The Company‘s product or service is widely available. The company is generating ongoing revenue
and is probably cash-flow positive. It is more likely to be profitable, but not necessarily.
It is the capital provided for marketing and meeting the growing working capital needs of an enterprise
that has commenced production but does not have positive cash flows sufficient to take care of its
growing needs. Second stage finance, the second trench of Early State Finance is also referred to as
follow on finance and can be defined as the provision of capital to the firm which has previously been in
receipt of external capital but whose financial needs have subsequently exploded. This may be second or
even third injection of capital.

The characteristics of a second stage finance are: -

i. A developed product on the market.

ii. A full management team in place.
iii. Sales revenue being generated from one or more products.
iv. There are losses in the firm or at best there may be a break even but the surplus generated is
insufficient to meet the firm‘s needs.

Second round financing typically comes in after start up and early stage funding and so have shorter time
to maturity, generally ranging from 3 to 7 years. This stage of financing has both positive and negative
reasons.

Negative reasons include.

I. Cost overruns in market development.

II. Failure of new product to live up to sales forecast.

III. Need to re-position products through a new marketing campaign.

IV. Need to re-define the product in the market place once the product‘s deficiency is revealed.

Positive reasons include.

I. Sales appear to be exceeding forecasts and the enterprise needs to acquire assets to gear up for
production volumes greater than forecasts.

II. High growth enterprises expand faster than their working capital permit, thus needing additional
finance. Aim is to provide working capital for initial expansion of an enterprise to meet needs of
increasing stocks and receivables.

It is an additional injection of funds and is an acceptable part of venture capital. Often provision for such
additional finance can be included in the original financing package as an option, subject to certain
management performance targets.

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Conclusions

With respect to second or follow on finance, following conclusions can be drawn.

a) As a shareholder rather than a creditor, it may be necessary to provide financing to the investee on
more than one occasion prior to realization.
b) Second round or latter round financing should be supplied only if the additional capital commitment
shows quantifiable benefits in the future. This can be judged by analyzing the prospects of the venture.

4.2 Later Stage finance

Later Stage Financing also called third stage capital is provided to an enterprise that has established
commercial production and basic marketing set-up, typically for market expansion, acquisition, product
development etc. It is provided for market expansion of the enterprise. The enterprises eligible for this
round of finance have following characteristics.

i. Established business, having already passed the risky early stage.

ii. Expanding high yield, capital growth and good profitability.

iii. Reputed market position and an established formal organization structure.

―Funds are utilized for further plant expansion, marketing, working capital or development of improved
products.‖‘2 Third stage financing is a mix of equity with debt or subordinate debt. As it is half way
between equity and debt in US it is called ―mezzanine‖ finance. It is also called last round of finance in
run up to the trade sale or public offer. Venture capitalists prefer later stage investment vis a vis early
stage investments, as the rate of failure in later stage financing is low. It is because firms at this stage have
a past performance data, track record of management, established procedures of financial control. The
time horizon for realization is shorter, ranging from 3 to 5 years. This helps the venture capitalists to
balance their own portfolio of investment as it provides a running yield to venture capitalists. Further the
loan component in third stage finance provides tax advantage and superior return to the investors.

Conclusions:

Later stage finance is development finance for business expansion. Venture capitalists prefer this because:
1. It provides immediate income besides high capital gains.
2. It has a balancing effect on their own portfolio because of low risk and shorter realization period.

Following are the subdivision of Later Stage Finance

 Expansion stage capital

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Definition: The company‘s product or service is in production and commercially available. The company
demonstrates significant revenue growth, but may or may not be showing a profit. Usually, the company
has been in business for more than three years.

Expansion/Development Finance an enterprise established in a given market increases its profits

exponentially by achieving the economies of scale. This expansion can be achieved either through an
organic growth, that is by expanding production capacity and setting up proper distribution system or by
way of acquisitions. Any how, expansion needs finance and venture capitalists support both organic
growth as well as acquisitions for expansion. At this stage the real market feed back is used to analyze
competition. It may be found that the entrepreneur needs to develop his managerial team for handling
growth and managing a larger business.

Realization horizon for expansion/development investment is 1 to 3 years. It is favoured by venture

capitalist as it offers higher rewards in shorter period with lower risk. Funds are needed for new or larger
factories and warehouses, production capacities, developing improved or new products, developing new
markets or entering exports by enterprises with established business that has already achieved break even
and has started making profits.

Conclusion:

To hedge against their investment in earlier stages, venture capitalist invests a small portion of their
capital in expansion / development stage both for organic growth and or merger / take-over. Financing
need at this stage is generally larger than earlier stages, demands lesser time and skills of the investors.
Hands on management are not needed and a board level representation is sufficient.

 Replacement Finance

Replacement Finance means substituting one shareholder for another, rather than raising new capital
resulting in the change of ownership pattern. Venture capitalist purchase shares from the entrepreneurs
and their associates enabling them to reduce their shareholding in unlisted companies. They also buy
ordinary shares from non-promoters and convert them to preference shares with fixed dividend coupon.
Later, on sale of the company or its listing on stock exchange, these are re-converted to ordinary shares.
Thus Venture capitalist makes a capital gain in a period of 1 to 5 years.

 Management Buy out and buy ins

Buyout Financing is a recent development and a new form of investment by venture capitalist. The funds
provided to the current operating management to acquire or purchase a significant share holding in the
business they manage are called management buyout. Management Buy-in refers to the funds provided to
enable a manager or a group of managers from outside the company to buy into it.
It is the most popular form of venture capital amongst later stage financing. It is less risky as venture
capitalist invests in solid, ongoing and more mature business. The funds are provided for acquiring and
revitalizing an existing product line or division of a major business. MBO (Management buyout) has low
risk as enterprise to be bought have existed for some time besides having positive cash flow to provide
regular returns to the venture capitalist, who structure their investment by a judicious combination of debt
and equity. Of late there has been a gradual shift away from start up and early finance to wards MBO
22
opportunities. This shift is because of lower risk than start up investments. Venture capitalist should build
portfolios by balancing early stage investments with MBOs. Thus they strike a balance between early
return through MBO with late pay off by early stage investment.

Some financial experts feel that MBO is not a venture capital activity. However during 1998/99 25
percent of venture capital funds of UK were invested in MBO / MBI providing assistance to 11 percent of
assisted units.14

 Turnaround Finance

Turnaround Finance is a rare form of later stage finance which most of the venture capitalist avoid
because of higher degree of risk. When an established enterprise becomes sick, it needs finance as well
as management assistance for a major restructuring to revitalize growth of profits. Unquoted company at
an early stage of development often has higher debt than equity; its cash flows are slowing down due to
lack of managerial skill and inability to exploit the market potential. The sick companies at the later
stages of development do not normally have high debt burden but lack competent staff at various levels.
Such enterprises are compelled to relinquish control to new management. The Venture capitalist has to
carry out the recovery process using hands on management in 2 to 5 years. The risk profile and
anticipated rewards are akin to early stage investment.

 Bridge Finance

Bridge Finance is the pre-public offering or pre-merger/ acquisition finance to a company. It is the last
round of financing before the planned exit. Venture capitalist helps in building a stable and experienced
management team that will help the company in its initial public offer. Most of the time bridge finance
helps improves the valuation of the company. Bridge finance often has a realization period of 6 months
to one year and hence the risk involved is low. The bridge finance is paid back from the proceeds of the
public issue.
Risk Perception and Activity to be financed

23
 Chapter 5

Venture Capital Fund Regulation

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5. Venture Capital Fund Regulation

Regulatory Structure

Venture capital industry in India is relatively in a nascent stage. It was started in India during late
eighties and regulated by central government guidelines issued on 25th November 1988. The concept of
venture capital in India was a logical sequence to the seed capital offered by the public financial
institutions for broadening the entrepreneurial base in the country by providing finance to primarily
technology oriented projects promoted by technocrat promoters. These guidelines focused on projects
promoted by the first generation entrepreneurs. The requisite powers under the guidelines were vested
with the Controller of Capital Issues (CCI). With the abolition of the office of CCI with effect from May
1992, the powers of CCI were vested in SEBI. SEBI Act 1992 was amended on 25 January 1995, which
empowered SEBI to register and regulate the working of venture capital funds. The government
guidelines were revoked in 1995 when venture capital investments came under the preview of SEBI.
Indian Venture Capital Association (IVCA) is a self — regulatory body of the venture capitalist in India.
It helps in setting up of the professional standards and practices in venture capital industry. Central Board
of Direct Taxes through Income Tax Act also regulates the activities of the venture capital firms.
Broadly there are two types of Venture capital funds/Venture capital companies. These are

1. Domestic Venture capital funds/Venture capital companies: and

2. Offshore or foreign Venture capital funds/Venture capital companies investing in India.

Domestic Venture capital funds / Venture capital companies organized in India are governed by three sets
of guidelines as follow:
i. MoF / Central Government guidelines;
ii. Securities and Exchange Board of India (Venture Capital Funds) Regulation 1996; and
iii. Central Board of Direct Taxes / Income Tax Rules.

5.1 Central Government Guidelines

The focus of these guidelines was on enterprises where the risk element was relatively high due to
technology involved being relatively new, untried or very closely held. It allowed venture capital to be set
up as a Venture Capital Company or a Venture Capital Fund. As per these guidelines the Venture capital
companies/funds were to invest in new companies to become eligible for concessional treatment of capital
gains available to non-corporate entities. For this the Venture capital assistance was to be provided to the
enterprises fulfilling the following criteria.

Size: Total investment in an assisted unit was not to exceed Rs. 10 crores.

Eligible Enterprises were to be established as limited companies. They were also requires to employ
professionally qualified accountants for maintaining their accounts. Enterprises engaged in trading,
broking, investment or financial services were not eligible.

25
Technology involved should be new or relatively untried or very closely held or being upgraded from a
pilot plant to commercial scale for the first time. Even the cases where there was a significant
improvement or an up gradation in the existing technology in India were eligible.

Promoters/Entrepreneurs: The first generation entrepreneurs who were relatively new and technically
or professionally qualified but non-affluent with inadequate resources and financial backing for the
project were eligible for assistance.

Secondary Investment The units already assisted by the venture capitalist were eligible for the second
round of financing for expansion or strengthening. Even the sick units were eligible for assistance under
these guidelines.

All venture capital companies / funds needed to be approved by CCI. Only all India public sector
financial institutions, scheduled banks including SBI and foreign banks operating in India and their
subsidiaries were eligible to set up venture capital companies or funds. Private promoters were permitted
in the joint ventures if the equity stake did not exceed 20 percent of the total equity and was not the
largest single holding. The venture capital company or fund was required to be managed by professionals
such as bankers, managers and administrators with adequate experience of industry, finance, accounts etc.
A venture capital company was required to maintain its independence and an arms length relationship
with its parent company.

A venture capital company or fund was required to have a minimum corpus of Rs. 10 crore. A minimum
promoter share of 40 percent was mandatory. NRIs were permitted to invest up 74 percent on non-
repatriable basis and up to 25 percent on a repatriable basis. Multilateral, international financial
organizations, development finance institutes, foreign mutual funds were permitted 25 percent of equity
as a medium to long-term investment. Debt could be raised with debt equity ratio not exceeding 1.5. The
venture capital company or fund was required to progressively invest at least 75 percent of its funds in
venture capital activities by the end of fifth year. For a venture capital company or fund to obtain tax
concessions all the units provided the equity support were to be certified by IDBI / ICICI / IFCI as
eligible units for venture capital financing.

With effect from May 1992 when the office of Controller of Capital Issues was abolished, the function of
regulating the venture capital companies and funds came under the preview of Securities and Exchange
Board of India.

5.2 Regulation by SEBI

SEBI Act empowered SEBI to inter-alia regulate the venture capital funds as these funds are a
part of the overall securities market and is a source of capital. Members of the scientific community form
a part of SEBI‘s advisory panel and it also invites top notch venture capitalists to be on the committees. It
announced the regulations for venture capital funds in 1996, with a primary objective of protecting the
interest of investors and providing enough flexibility to fund managers to make suitable investment
decisions. Since this is considered to be a high risk high return business, the participation by the very

26
small investors has been restricted and only high net-worth individuals and institutions, both domestic and
foreign, are allowed to participate with a minimum investment of Rs. 5 lakh.

Setting up a Venture Capital Fund

The eligibility criteria have been relaxed and now active participation by private sector is allowed. A
venture capital fund can be constituted in the form of a trust or a company. Venture capital fund appoints
an asset management company to manage the portfolio of the fund. A venture capital company may take
up the activity of venture capital fund and an asset management company. Earlier guidelines prescribed a
prior approval from the Department of Economic Affairs, Ministry of Finance. Similarly SEBI
regulations stipulate the registration of the organisation with SEBI and grant of certificate for
commencement of the business of venture capital financing. Application for registration and grant of
certificate are to made alongwith an application fee of Rs.25000/- in the prescribed form as given in the
annexure. A Venture capital fund should have a minimum corpus of Rs. 5 crore before it can start Venture
capital activities. As per these guidelines and the guidelines issued by the Central Board of Direct Taxes
(CBDT) a venture capital fund could invest up to 40 percent of the paid-up capital of Investee Company
or up to 20 percent of the corpus of the fund in one venture.

Investment Conditions and Restrictions

Restrictions: SEBI Regulations requires that at least 80 percent of the corpus of the fund should be
invested in unlisted shares of the venture capital assisted companies. Earlier investment restrictions like:
i) Maximum permissible investment of Rs. 10 crore per venture. ii) Investment only in new and relatively
untried technology; iii) Requirement that the promoters be new and professionally and technically
qualified, has been done away in these guidelines. Now a venture capitalist has a freedom to invest in any
new enterprise without regards to newness of either the technology or any consideration for first
generation entrepreneurs or even insisting on professional or technical qualification of the promoters.

The venture capital funds are however prohibited from investing in the share capital of companies
providing financial services. This means all non-banking finance companies, hire purchase, leasing,
housing finance companies are debarred from receiving the venture capital assistance.

A venture capital fund is not allowed to carry activity other than venture capital financing.

Support for later stage and turnaround financing The regulation permits investment by venture capital
funds in equity shares or equity related securities of financially weak and sick companies who may or
may not be listed. Companies having eroded their net worth by more than 50 percent but not less than 100
percent in previous year are considered as financially weak and are eligible for this purpose. Thus the
regulation supports later stage and turnaround financing by the venture capitalists.

The venture capitalists are also free to finance any company that has already been provided venture
capital assistance.

27
Investment in listed companies Venture capitalists can invest the balance 20 percent of the venture
capital fund in any listed company‘s securities. This balance of 20 percent can also be in non-equity
securities besides loans and intercorporate deposits.

Financing Venture Capital Funds

In addition to its corpus the venture capital funds can mobilize resources from Indian and foreign
including nonresident, investors. It can raise resources through private placement of its securities or units
but only after completion of three years. For this the venture capitalist has to submit a placement
memorandum to SEBI. The memorandum should contain the detailed terms like maturity period, mode of
distributing benefits to the investors, winding up procedure etc. On the expiry of 21 days of its submission
if no objection is raised by SEBI, such private placement can be done with institutions and high net-worth
individuals. Even the earlier guidelines permitted venture capitalists to raise funds through private
placement. The investment by Indian nationals other than employees, directors and trustee of venture
capital funds should not be less than Rs. 5 lakhs.

However a venture capital fund is prohibited from raising capital from general public by issuing securities
or units through a public offer. Mutual funds can invest five percent of the corpus of an open-ended
scheme in a venture capital fund. It is ten percent in case of close-ended schemes. This allows retail
investor to invest in venture capital.

Winding Up and Other Provisions

The regulations provide different schemes for winding up of the venture capital funds set up as trust or
company. A venture capital company is wound up as per the provisions of the Companies Act, 1956. The
trust can be wound up as per the trust laws on the expiry of the scheme or earlier if the trustees consider
winding up is in investors‘ interest and inform SEBI of the same. Trusts can be wound up if 15 percent of
the investors pass a resolution for winding up and forward the same to SEBI.

The regulation also provides for inspection and investigation besides action in case of default by the
venture capitalist.

Recent Revisions: These regulations have been amended on 17th November 1999 by Securities and
Exchange Board of India (Venture Capital Funds) (Amendment) Regulations, 1999. The amended
regulations provide for a body corporate set up under an Act of Parliament or State Legislature to make an
application for grant of a certificate of registration to start a venture capital fund.

The minimum corpus of the venture capital funds has now been fixed as Rs. 5 cores.

5.3 Central Board of Direct Taxes

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The government of India had announced tax concessions for investment by venture capital funds subject
to compliance with the guidelines issued the Central Board of Direct Taxes (CBDT) Hence CBDT also
regulates the venture capital industry. The guidelines issued by CBDT have been relaxed from time to
time, as it removed the condition of time bound investment by the venture capital funds and also the lock
in period of three years.

The venture capital funds desiring to claim exemption from income tax were required to follow CBDT
rules as under:

• Registration with SEBI.

• Claiming income tax exemption in respect of dividend and capital gains income.
• Not to invest in more than 40 percent in equity of an assisted unit this restriction has now been
removed.
• Investment in a single company should not exceed 20 percent of the corpus of the fund. This
restriction has now been removed.
• Venture capital investments are required to be restricted to domestic companies engaged in
business of 1) software; ii) Information Technology iii) production of basic drugs; iv)
biotechnology; v) agriculture and allied sector; vi) such other sectors as may be notified by the
central government in this behalf vii) production or manufacture of any article or substance for
which the patent has been granted to the National Research Laboratory or any other scientific
research institution approved by the Department Of Science and Technology. This restriction has
now been superceded by a negative list.
• 80 percent of the investible funds are to be invested in equity shares of domestic companies
whose shares are not listed on a recognized stock exchange.
• Since dividend income in India is already tax exempted, the tax break is basically a 10 percent
capital gain tax.
• They pay maximum marginal tax (35%) in respect of non exempt income such as interest
through Debentures etc.

Venture Capital Funds Regulations

As per SEBI Regulation As per Income Tax Rules Remarks

Scope and Definitions

Venture Capital Fund

Fund established in the form of a
company or a trust which raises
funds through loans, donations,
issue of securities or units as the
case may be or makes or
proposes to make investment as
per SEBI regulation
Venture capital company or Income tax provisions require
venture capital fund operating registration of trust deed.
under trust deeds registered
under Registration Act,
established to raise funds by
trustees for investment mainly by
way of acquiring shares of
venture capital under-takings in
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 accordance with the prescribed
regulations

Venture Capital Undertaking

Venture Capital Undertaking is
not defined
It is an unlisted domestic
company that is engaged in
manufacture of notified articles
or things.
For tax exemption the venture
funds should invest in domestic
companies engaged in production
/ manufacture of notified
products / articles

Investment Norms

Venture capital Funds are barred
from investment in any company
providing financial services.
At least 80% of the funds shall be year, 80% of the funds raised in
invested in equity or equity
related securities of unlisted
companies
Equity investment is permissible
in listed or unlisted financially
weak and sick companies
When seeking tax exemptions
VC Funds to invest 20 % of the
funds raised in that year, 50% of
the funds raised in succeeding
next succeeding year are to be
invested in approved VC
undertakings.
In case of companies 20%, 50%,
80% of total paid up capital has
been referred.
SEBI regulation does not
prescribe any time frame for
achieving investment levels.
Norms regarding achieving
investment levels up to 20% and
50% were relaxed.
CBDT recognises investment
only in financially weak unlisted
companies while SEBI
recognizes the same irrespective
of listing status

Minimum Investment in A Venture Fund

Min Rs. 5 lakhs by one person Not prescribed

Minimum Holding Period for Investment

Not prescribed At least 3 years or till listing of

securities if earlier.

Maximum investment in a company

Not prescribed Not more than 5% of the funds
raised in case of trust or paid
share capital of venture company
can be invested in a single
venture
No restriction on max investment
size by SEBI.
The prevalent 5% limit has been
increased to 20%

At least 80% of the funds shall be

invested in equity or equity
related securities of unlisted

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 companies. Venture funds can
invest up to 40% of the paid up
capital of a company.

Exit Norms

Not prescribed One year after the SEBI does SEBI does not favor this
listing of the not favor investee
company, this venture capital
fund will have to exit or give up
tax pass through benefit.

5.4 Regulation of Foreign Venture Capital Funds

Reserve Bank of India (RBI) regulates the flow of foreign currency into and out of India. SEBI
regulations were not applicable to foreign venture funds and these were not registered with SEBI. These
operate as Foreign Investment Institutions and are regulated by Government of India Guidelines issued on
20th September 1995.

The offshore investors are permitted to invest up to 100 percent in an approved domestic venture
capital fund or company after obtaining an approval from Foreign Investment Promotion Board FIPB.
They could also set up a domestic asset management company to manage the Fund. However
establishment of an asset management company with foreign investment to manage such funds would
require FIPB approval and many a times, while granting approval, the FIPB may not permit the offshore
venture capital to be managed from outside India. SEBI regulations do not insist of a two tier system of a
trust and asset management company. Thus the domestic vehicle can either be a trust and be managed by
the trustees or can be structured as a company where a committee looks after investments. The asset
management companies so formed are treated as NBFCs that can act as foreign holding companies. These
foreign NBFCs are permitted to invest in down stream subsidiaries in India with minimum of 25 percent
domestic equity. An initial amount of 10 percent of this domestic equity is to be brought by front and the
balance is to be added within 24 months.

Once approved by FIPB such domestic venture capital funds do not need any more approval from
FIPB for further venture capital investment but are subjected to normal restrictions on venture capital
funds. The maximum investment is subject to relevant equity investment limits that may be in force from
time to time in relation to areas reserved for the Small Scale sector.

Taxation: The tax exemptions available to domestic venture capital fund or company is extended to
venture capital which attract overseas investments provided these venture capital funds or companies
conform to the guidelines applicable for domestic venture capital. Income earned by the funds from
Indian venture capital fund is subject to tax as per the normal rate applicable to foreign investors or the
rates specified in the tax treaties.

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Offshore investors may also invest directly in the equity of unlisted Indian companies without going
through the route of domestic venture capital fund or company. Offshore venture capital is often
organized as a foreign company that invests in unlisted Indian companies; sometimes the funds are
organized as offshore funds and are managed by asset / investment management companies (AMC/IMC)
set up in any tax favorable jurisdiction. The AMC could manage the fund and be advised by an Indian
advisory company. The fund thus undertakes venture capital activities following direct investment route
(FDI). In such cases each investment will be treated as a separate foreign investment and will require
separate approval as required under the general policy for foreign investment proposals.

Investment by NRIs: Non resident Indians and corporate bodies including trusts, societies partnerships
etc. that have at least 60 percent equity holding by NRIs (OBCs) are allowed to invest 100 percent in
Annex III industries on an automatic basis with full repatriation benefits. They can invest up to 24 percent
in India in any other business except agriculture and plantation. The main advantage on such a structure is
saving time on government approvals which at times is an important factor. India Investment Fund of
ANZ Grindlays 3i/Investment Services was structured as an OBC Offshore Fund.

Taxation: As discussed earlier dividend income is tax exempt. For offshore funds operating as an FII long
term capital gain from disinvestments in listed and unlisted securities is taxed at 10 and 20 percent
respectively. Short term capital gains arising from disinvestments in listed and unlisted Indian companies
are taxed at the maximum rate of 45 percent. Interest income on foreign currency denominated loans is
charged to tax at the rate of 20 percent. All other income earned by the fund is taxed at 48 percent.

Since most of the offshore investments are routed through tax havens and get exemption from
income tax under tax avoidance treaties they are able to bypass the investment restrictions as prescribed
by SEBI and CBDT for availing of the tax benefits. A special tax treaty between India and Mauritius
gives funds registered in Mauritius a special tax-exempt status for all long term and short term capital
gains in India. This denies a level playing field for domestic venture capitalists. The finance minister in
the budget speech on 29th February 2000 that SEBI will be a single point nodal agency for registration
and regulation for both domestic and overseas venture capital funds. He stated that tax laws and SEBI
guidelines were being formulated accordingly.

Foreign venture capital funds can exit from an Indian company only at a price worked out on the
basis of a formula that came into effect during the time of the Controller of Capital Issues and had
remained since then. The Reserve Bank of India (RBI) has recently relaxed its rule for foreign venture
funds registered with SEBI. Now these funds can exit at a mutually acceptable price without the prior
approval of RBI. As per SEBI this has been done to motivate the overseas venture capital funds to register
with SEBI.

5.5 SEBI-Foreign Venture Capital Investor- Regulations, 2000

In order to regulate the activities of the overseas venture capital investors and to provide a level
playing field to the domestic venture capitalists, SEBI notified Foreign Venture Capital Investors-
Regulations, 2000 on September 15, 2000. Overseas investors desiring to make venture capital
32
investment in India are required to get the necessary approval by the Reserve Bank of India for making
investments in India without going through an Indian fund. Alternately they have to apply and register
themselves with SEBI for making venture capital investment in India. Bodies incorporated outside India
that are authorized to invest in venture capital funds or carry on activity of a venture capital fund and
regulated by an appropriate foreign regulatory authority are eligible to be registered under this
regulations.

As per these regulations a ―foreign venture capital investor‖ means an investor incorporated and
established outside India, which proposes to make investment in venture capital fund(s) or venture capital
undertakings in India and is registered with SEBI. Overseas venture capitalists can invest in India either
by setting up their own venture funds here or through a domestic fund. That fund would get the tax pass
through benefit. They are required to appoint domestic custodian for the custody of the securities, enter
into an arrangement with a bank to operate a non-resident or foreign currency account. The registered
foreign venture capital investors have to abide by these regulations. The minimum corpus of the fund
would have to be Rs. Five crores.

The registered foreign venture capital investors would get the benefit of being able to
automatically bring in their investments, without going through the FIPB provided the investments are
within the overall ceiling fixed for the sector. Venture capital funds would also be permitted to invest
through automatic approval route even when their investments result in transferring the shares of an
Indian company to a foreign / NRI / OBC investor. Such transfers are subject to case by case approvals.
The registered overseas venture capital funds have no limitations in investing in competing technologies
and trademarks through the automatic route. This is to encourage foreign venture capital funds to
participate in knowledge based and high risk industries. They would also be exempt from the RBI‘s exit
pricing norms for foreign investors.

Those who prefer to continue investing as private equity funds can continue to do so but they
would not enjoy the benefits being accorded through these regulations. The provision is made especially
for the foreign angle investors to be able to operate in India.

However the body corporate whose application is rejected is not allowed to carry on any activity
of venture capitalist.

Investment Criteria for a Foreign Venture Capital Investor:

All investments to be made by foreign venture capital investors shall be subject to the following
conditions:

a. It shall disclose to the Board its investment strategy.

b. It can invest its total funds committed in one venture capital fund, however it cannot invest
more than 25% of the funds committed for investments to India in one Venture Capital
Undertaking.

33
 c. At least 75% of the investible funds are to be invested in unlisted equity shares or equity linked
instruments in the Venture Capital Undertaking and not more than 25% of the investible funds
may be invested by way of: subscription to initial public offer of a venture capital undertaking
whose shares are proposed to be listed subject to lock-in period of one year and debt or debt
instrument of a venture capital undertaking in which the venture capital fund has already made an
investment by way of equity.

d. Investment in the associated companies of the fund is not allowed.

e. Investment in the activities specified in the negative list as given in the third schedule, that is
real estate, none banking financial services, gold financing and activities not permitted under the
Government‘s Industrial Policy, is not permitted.

f. Other investment norms are same as for domestic venture capital funds.

5.6 Self Regulation by IVCA

In a responsible society all professional organizations collectively form a body to regulate
themselves by developing a voluntary code of conduct and making the code binding their members.
Indian Venture Capital Companies / Funds have formed a voluntary association which acts as their
representative and self regulatory body. It is named Indian Venture Capital Association and is modeled on
the lines of American Venture Capital-Association. The association was formed to co-ordinate the
activities of its members. Its main objective is to set up professional standards and practices in venture
Capital industry, to bring about better coordination among Venture Capital companies and funds, to
represent the interest of Venture Capital companies and funds to the government and other regulatory
bodies.5 It had made suggestions to government and SEBI regarding changes sought in the venture capital
guidelines and regulations. WCA also organizes and conducts programs for training of personal for the
venture capital industry. Presently IVCA is compiling a database on the venture capital industry in India
so as to be able to provide authentic information to government agencies, international venture capital
organizations / companies, angle investors and others having interest in the venture capital investment in
India. IVCA is meant to promote the venture capital industry in India, lobby with the government and the
regulators i.e. SEBI, CBDT. It plans to bring in self-regulation in the industry through its members and
thus reduce the scope of outside regulation.

IVCA has been bringing out an Annual Report from the calendar year 1993. This report
highlights the general trends in the Indian venture industry and includes member profiles. The
membership policy and code of conduct also form a part of this report. IVCA members fall into different
categories. Some function as investment and fund management companies, others set up funds and
function as asset management companies. Some companies manage domestic funds, some manage
offshore funds and some manage both domestic and offshore funds. Financial organizations investing in
venture capital as a minor activity and offshore fund management companies engaged in venture capital
business are taken as non-voting associate members of 1VCA. At present the association has 28 members,
which include leading domestic as well as offshore venture capital funds.
34
5.7 Structuring of Venture Capital in India
1. Venture capital company
2. Trust fund
3. A scheme of unit trust of India
4. Off- shore entity
5. A statutory body

Venture capital Company

Some of the venture capital organizations are structured in the form of a company. Here
shareholders are investors in the fund. RCTC Ltd and TDICI Ltd. were the oldest VC companies in India.
Presently venture capital companies have to register themselves with SEBI and take a certificate before
commencing their operations. Structuring the venture investments through this route had some
shortcomings;

a) A company is promoted on the concept of a going concern where as venture capital investors like to
lock in their investment for a limited period. Thus the company needs to be dissolved after a certain
period and the winding up procedures for a company are cumbersome with a lot of procedural formalities.

b) Venture capital investors seek returns in the form of capital gains as such returns are more tax efficient.
When structured as a company venture capitalist can be provided their returns by way of dividends, which
attracted a dividend tax. All venture capital companies or funds were required to pay an income tax of 20
percent on income distributed as dividend. This has presently been exempted.

c) As yet there are problems in redeeming the share capital of a company to provide return to the
investors.

APIDC Venture Capital Limited and IFB Venture capital finance are venture capital companies promoted
by state and private sector respectively and are registered with SEBI.

Trust Funds

Structuring the venture instruments as Trust funds overcomes some of the shortcomings
encountered in a company. A trust normally has a limited life and is wound up on a pre-determined time
or even earlier if the trustees so desire and there is an enabling provision in the Trust deed. The units can
be redeemed during the interim period of operation of the Trust fund.

The venture capital funds in India are registered under Indian Trust Act 1882 and also registered
as Venture capital trust with SEBI. Here, pools of funds available for investment from investors are
entrusted to Trustees of the fund. Individuals as well as companies can become Trustees. When the trustee
themselves manage the funds it is a two layer structure consisting of investors and trustees. Gujarat
Venture Capital Fund and Canbank Venture Capital Funds are two layer trust funds, which are managed
by their trustee that is Gujarat Venture Capital Ltd. and Canbank Financial Services Ltd. In a three-layer
structure trustee entrust the fund to an asset management company for management. Normally an AMC is
specially created for this purpose. The board of directors of AMC is subordinate to the directors of

35
Trustee Company and report to the Trustee Company. The Trustee Company specifies contribution /
disbursement procedure, induction of new contributors and issue related to investment objectives, policies
and guidelines etc. The responsibility of Trustee Company and AMC is delineated to ensure that there is
no overlapping.

AMC is normally paid under two heads - a fixed fee linked to the corpus of the fund and a
variable fee linked to the performance of the fund. After providing a normal (agreed) rate of interest to the
investors the net capital appreciation is shared by AMC with the investors in a pre agreed proportion, say
on 80 - 20 basis. For example IFCI venture receives a management fee at the rate of 1.875 percent per
annum of the cumulative disbursements and is also entitled to 7.5 percent of surplus generated on
termination of Vecaus fund.

Structuring Scheme

In India a few initial funds were structured as schemes of unit trust of India (UTI) wherein the
corpus of fund is subscribed by UTI and various domestic and foreign investors like LIC, GIC, and ADB
etc. A manager or an Asset Management Company manages the fund. As all the schemes of UTI were
exempt from tax under Unit Trust of India Act, the venture capital so floated enjoyed tax exemption.
Initial funds of TDICI and RCTC were structured as schemes of UTI and were funded by UTI and
multilateral funding agencies like International Finance Corporation, Asian development bank etc.
Vecaus I, II and III managed by TDICI and RCTC were such funds.

In India some funds have been set up as divisions of banks and financial institutions instead of
separate legal entity. The prominent amongst them are venture capital activities of IDBI and SIDBI. IFCI
had structured Risk Capital Foundation (RCF) as a venture capital scheme, which in 1975 was converted
into an investment company. State Bank of India also set up SBI Venture Fund as a scheme of the bank.
Herein the profits of venture capital divisions are taxed along with the profits of the financial institute.
Earlier IDBI was exempted from income tax and it made sense in structuring the venture capital as a
division of the company.

Structuring of Offshore Funds

ANZ Grindleys 31 Investment Limited structured and managed two off shore NRI funds (India
Investment Fund I and II) The venture capital funds promoted and structured in India are required to
comply with SEBI and CBDT regulations. The private equity funds caring out venture investment and
structured outside India did not fall under the preview of SEBI and CBDT for venture capital investment
in India. The offshore funds are structured in Mauritius to avail of benefit of tax avoidance treaties
between Mauritius and India. Typically, a fund is constituted as a non- resident offshore fund in Mauritius
while trustee of the fund are constituted as resident companies of Mauritius. JF Electra (Mauritius) Ltd. is
an offshore fund registered in Mauritius and is managed by JF Electra Advisors (India) Limited a Hong
Kong based company with its principal office in Mumbai, India. On the other hand Walden Nikko India
Ltd. is a foreign venture capital company operating in venture capital financing as a Foreign Institutional
Investor.

36
 Even today when SEBI has formulated registration and regulation for the offshore venture capital
funds, a window is still open for private equity funds registered in Mauritius to make venture investments
in India.

Statutory Body

The Securities and Exchange Board of India (Venture Capital Funds) (Amendment) Regulations,
1999 in November has made a provision for statutory bodies set up by Parliament and State legislatures to
set venture capital funds after applying to SEBI for registration and obtaining the necessary certificate.
Venture fund set up for IT industry by SIDBI with the financial participation and support of Central
government is the first example of this kind.

5.8 Limitations of Structuring of Venture Capital in India

SEBI rules permit venture capital to be structured as a company or a trust fund with a three tier
mechanism; investor, trustee company and AMC. A tax efficient vehicle in the form of ‗Limited Liability
Partnership Act‘ which is popular in USA is not made available for structuring venture capital in India. In
a Limited Liability Partnership while investor‘s liability towards the fund is limited to the extent of his
contribution in the fund the formalities for structuring the fund are simpler.

It is now accepted that an efficient structure for venture capital is one that is tuned to the following four
characteristics of venture investment;-

• Different classes of investors.

• Limited liability of the investors.
• Flexibility in operations.
• Transparent and efficient taxation.

5.9 Different Classes of Investors

The persons investing in venture funds vary in their risk profile, tax liability, requirements, and
investment timings in terms of entry and exit, investment policies and preference for voting rights. A
large majority of them are passive investors and are not inclined to participate in fund‘s operations. Some
of them are active and prefer to act as fund manager or be more active in management of the Fund. The
venture capital structure should be flexible enough to allow different classes of investors and to
differentiate the role of investors and managers with their share in Fund‘s profits and losses.

Limited Liability:
Most of the investors are passive investors and participate primarily for capital gains. They would
do so only if theirs liability is limited to the moneys committed by them upfront. The company structure
fulfils this need satisfactorily.

Flexible Operations:

37
 The venture capital structure should provide enough flexibility during investment and
disinvestment process so as to be able to serve the investors interest in the fast changing economy. It
should be flexible to decide its operation on a case-to-case basis within a uniform regulatory framework.
The structure should be such that it is capable of offering a variety of investment instruments with
different risk profile. Partnership concerns are more flexible as compared to companies or trusts.

Taxation:
It is always desirable to have a structure that is transparent and allows the tax to be levied on
individual investors at their personal tax rate. Different investors for example individuals, companies, non
resident Indians, foreign bodies, off shore institutions including multilateral organizations like Industrial
Finance Corporation and Asian Development Bank participate in venture funds. These have different
marginal tax rate. Some of these like IFC, ADB and off shore investors registered in different tax heavens
enjoy tax exemption under various treaties. Indian structure had been taxing all of these at a flat tax rate
by levying tax on the Funds.
Presently a large number of investors are getting their funds registered in Mauritius to save on
income tax. On one hand this puts the domestic Funds to disadvantage and on the other drives capital to
foreign countries. A tax transparent structure that gives a tax pass through status to venture capital is
suitable for domestic venture funds as well as the venture capital investors in India and abroad. The same
has been established with effect from assessment year 2001-02.

United States, where the venture financing has matured and made a major contribution to the
economy provides a statuary structure of Limited Partnership (LP), Limited Liability Partnership (LLP),
and Limited Liability Company (LLC). A close look at these structures can help us in selecting a suitable
structure and modifying the same to suit our conditions.

Limited Partnership:

In general partnership the partners have unlimited liability. All partners, jointly and severally, are
equally responsible for partnership‘s activities. Each partner is personally liable for the total debts of the
partnership. In case of a limited partnership, there are two types of partners, general partners and limited
partners. The general partners have unlimited liability as in the case of general partnership. The liability
of the limited partners is limited. They may have a right to vote but cannot participate in the control of
partnership.

A limited partnership is defined as a partnership formed by two or more persons, having as

members one or more general partners and one or more limited partners. The general partners are
personally liable for the debts of partnership, have a power to act on behalf of the partnership and have
control over the partnership, On the other hand, limited partners, do not participate in the control, do not
have the power to act for the partnership and are not personally liable for the debts of partnership.

The limited partnership agreement defines the partnerships affairs and the manner of conducting
the same in such a way to provide maximum flexibility in its operations. The agreement may also provide
for different classes of members and managers having separate rights, powers and claims on assets /

38
liabilities, profits / losses of the limited partnership. A limited partnership is for a period specified in the
agreement and stands dissolved and its affairs wound up at the specified time or on the occurrence of a
given incident. It is taxed like an ordinary partnership, wherein the members are individually taxed for
their proportion of profits or losses.

Limited Liability Partnership:

In a limited liability partnership the partners are protected from personal liability for claims
related to other partner‘s negligence, error, omission and incompetence. The partner‘s liability is also
limited for the negligence, error, omission and incompetence of the partnership employees or other
agents. It is defined as a form of general partnership that provides an individual partner protection against
personal liability for certain partnership obligations. While being responsible for partnership‘s debts and
obligations it protects the partners only against tort claims and not from the liability due to their
negligence or wrongful conduct. The creditors are allowed to pierce the limited liability shield of a
partner. In US a limited liability partnership is taxed as partnership. Only the partners are taxed and not
the partnership firm.

Limited Liability Company:

It is a new entity even in U S. It is also called as statutory partnership association. A limited

liability company can have the benefits of the limited liability of a company and the flexibility and tax
benefits of a partnership. The investors can participate actively in the business, like general partners in a
partnership. [In U S Limited Liability Company gets the tax benefits of a partnership where the partners
and not the firm are taxed.]

The major advantage of structuring a venture fund in any of these structures is the avoidance of
taxation at two levels, that is, at the level of the fund and at the hands of the investors (members). Of the
three, limited partnership is widely used in U S and is the most appropriate for Indian conditions. Herein
the general partners who control the activities of the partnership have unlimited liability towards outsides
and creditors. The liability of the passive investors and limited partners is limited to their investment,
besides the rewards can be shared between the two type of members as per the pre agreed plan. However
this will need a suitable change in the Income Tax Act for taxation of partnership to its status prior to
assessment year 1993-94 when partners and not the partnership firm was taxed.

To sum up setting up of investment bodies for channelizing funds from investor to investee
constitutes structuring of venture capital. Venture capital in India can be structured in the form of a
company or a trust. Trust fund offers benefits such as limited life / time span, winding up / dissolution on
a pre-specified basis, income distribution etc. over structuring of investment in a company.7 The changes
in the statute are required to provide a limited partnership as a more efficient structuring of venture capital
in India.

39
 Chapter 6

Alternatives to VC funding

40
 6.0 Alternatives to VC funding
6.1 Fund from operations:
Existing operations is first place to look for funds. It may be possible to ―tune‖ the business to
reduce cash needs or generate more cash from existing customers. If this is a startup, the first year
month-by month operating and cash projections show how well an entrepreneur has thought
through his business, optimized elements that generate cash, planned new investment burn rate
and identified contingencies.
6.2 Interested partners:
License part of your solution: You may be able to enlist others to exploit parts of the market.
For example, biotech companies like Genentech license their new processes and drugs to
major pharmaceutical companies and Ballard Power Systems licensed their fuel cell
technology to the major automotive companies.
Launch Customers: Do you have any customers who are willing to fund your R&D to get the
product?
Vendor financing: How much can your suppliers of equipment and facilities provide?

Research grants: Small Business Innovation Research (SBIR) grants and other ―gifts‖ that
don‘t need to be repaid are available from various sources.
Sweat equity: There may be people willing to work for stock options, reducing up-front cash.
6.3 Fund it yourself
(a) Its beneficial not to have to answer to creditors; and
(b) The return on your investment should be higher than other places where you could invest your
money.
6.4 Debt financing:
In today‘s low interest world, debt is a low-cost capital source. You can also finance your
equipment, facilities, and receivables at rates lower than venture capital. Even with VC funding,
the venture capitalists will maximize debt to minimize their investment, so you might as well take
this step yourself first.
6.5 Friends, family and angels:
Friends and family are more likely to loan risk money and likely to charge less because you are
more bound to pay them back than you would someone with whom you only have a business
relationship. Friends and family financing can also be a precursor to venture capital. It is often
debt convertible to shares at the lender‘s option.

6.6 Comparing the alternatives

Operations Partners Self Debt Friends VC

Size of Varies Varies Small Varies Small $2-20M
investment (~$100K) (~$100K

Cost of Free Free to Free to 5-10% 8-12% 25-60%

Capital 10% 5% + option
Risk Not Not Varies Low Varies High
Tolerance Applicable applicable
Financials Company Not Company Bank/ Friends/ Audited
applicable company Company
Emergency Owners Owners Owners Bank Friends VCs
Control

41
 Chapter 7

Venture Capital Operations in India

42
7. Venture Capital Operations in India
Over the last few years Indian venture capital has evolved its own set of procedures and practices.
The foremost of these practices is the manner in which Indian venture firms choose their investments.
Like their counterparts in US and Europe venture capitalists here look for investments with a
characteristic of high risk and high return. The choice of investment is the function of the venture
capitalists policy with regards to the preferred industries and the stage of the investee company, yet the
exact choice of investment vary from one venture capital fund to another.

7.1 Factors Influencing Venture Capitalists Choice of Investment

The venture capitalists usually take into account the following factors while deciding on the
investment.

1. Track record of the promoters and the management team is the single most important factor. It is often
said that three most important considerations in selecting the venture capital investment are
―Management‖, ―Management‖ and ―Management‖. Venture capitalists look for a track record in terms of
the successes of the promoters in their previous vocations, whatever these might have been. They put their
bets on successful people and avoid those who have tasted failures earlier.

A venture capital fund manager does not take more than ten minutes to decide if the management
quality is not okay. The two key points a venture capital manager sees are weather the entrepreneur has a
vision and whether the management team is cohesive. Here he looks for various questions like:

> How do entrepreneurs work together?

> How compatible is the venture capital fund with the team?
> How complete is the management expertise in the area of business? This means, do the team have
members with expertise in various aspects of business.
> How is the chemistry between various members of the team?

They also check on the softer issues like temperament of team members, past record and overall
management competence.

2. The nature of the business and the promoters experience in the proposed or related business is an
important consideration. Venture capitalists are the firm believer of the Corridor Principal1 that states that
the probability of the venture‘s success is high when the business falls in the corridor of the
entrepreneur‘s previous vocation or education.

3. The business should meet the investment objectives of the venture capitalist in terms of risk profile, the
return and the time horizon of the fund. In case of closed ended funds, if the venture capital has earned a
substantial return in the first round of investments, it is more open to investments with comparatively
higher risk. In the initial investment rounds of a fund the venture capitalist is normally willing to take a

43
longer term exposure as compared the later rounds when the fund is nearing maturity. In the later rounds
the venture capitalist goes in for balancing investments.

4. The funds normally invest in select industries where they have the knowledge and expertise. This helps
then in providing value added services to the investee companies.

5. Project cost, scheme for financing and financial projections over next few years, including details of
underlying assumptions are closely studied, The resultant Internal rate of return (IRR) must meet the
minimum fixed by the venture capitalist as the hurdle rate. The IRR is adjusted for any protection, the
venture might be enjoying in the form of subsidy or any other concession from any government or
statutory body. This is to ensure the inherent earning potential of the investment in spite of policy changes
by the government.

6. Marketing strategy, including target market, market survey, marketing effort, market size and growth
potential also effect the decision.

7. Technology and technology collaboration if any are looked at carefully.

8. Miscellaneous factors looked at include raw material availability, pollution clearances, government
policy, rules and regulations — controlling the industry, location, water and electricity needs etc..

Most of the venture capital firms do not want an introduction from any one. A business proposal
that is well prepared is the best introduction that one can ha‘ye. Most venture capital firms are interested
in good investments and not in social contacts and introductions.

A detailed and well-organized business plan is the only way to gain a venture capitalist attention
and obtain funding. VCs do not invest in a two page summery. The summary is needed as a start but not
as a substitute for a sound plan. A well prepared business plan serves two functions. Firstly it informs the
venture capitalists about the entrepreneur‘s ideas, secondly it shows that the entrepreneur has seriously
thought about the intended business, knows the industry and has thought through all the potential
problems.

The summary should contain the name, address and telephone number of the contact persons in a
conspicuous location. Briefly the type of business or nature of industry should be discussed. This should
be followed by a thumb nail sketch of the company‘s up to date history. The experience of the
entrepreneurs and the top management personal should be mentioned. A short description of product or
service is required. The amount of funds and the form in which required should also be given. Summary
of five years financial projections and five years history of existing group companies should be appended.
Besides the exit plan should also be mentioned.

The detailed proposal must cover the following issues.

I. Business and its Future

1. Nature of Business
2. Business History
3. Future Projections

44
4. Uniqueness
5. Target Customers
6. Competition
7. Production Process
8. Market
9. Labor and Employees
10. Suppliers
11. Sub-contractors
12. Plant and Equipment
13. Property and Facilities
14. Patents and Trademark
15. Research & Development
16. Litigations
17. Government Regulations
18. Conflict of Interest
19. Orders outstanding
20. Insurance
21. Taxes
22. Corporate Structure

II. Management
1. Directors and Officers
2. Key Employees
3. Remunerations
4. Conflict of Interest
5. Principal Share Holders
6. Consultants, Lawyers Accountants, & Bankers

III. Financing
1. Proposed Financing
2. Collaterals
3. Condition of Financing
4. Proposed Reporting and MIS
5. Investor Involvement
6. Capital Structure
7. Guarantees
8. Use of Proceeds
9. Fees Paid

IV. Risk Factors

1. Limited Operating History
2. Limited Resources
3. Limited Management Experience

45
4. Market Uncertainties
5. Production Uncertainties
6. Liquidation
7. Dependence on Key Management Personal
8. What Could Go Wrong?

V. Analysis of Operations and Projections

1. Financial Projections
2. Ratio Analysis
3. Contingent Liability

VI. Product Literature, Procedure and Articles

Venture capital firms in India usually have either a fixed format or guidelines on how to present a
proposal and the information they are looking for.
IDBI has prescribed a preliminary application format, to include, brief details of performance of
industrial concerns if existing, nature and advantages of the proposed process / product, development
content in the process, proposal for scheme including nature of up-scaling and appropriate cost of venture.
After examining the prima facie eligibility of the proposal a detailed application form is send by IDBI.

In case of IDBI the factors taken into account while appraising the project include the technology
development content. The commercial aspects such as cost advantage of the proposed technology, market
potential, demand supply gap, and the availability of management team well versed in various disciplines.

Indus venture capital fund usually accepts the project report prepared as per the format prescribed
by the financial institutions as in most cases the project will have been received and appraised by the
institution before it comes to Indus Investment Fund. Customer is asked to bear the transaction cost
relating to investment by Fund including any professional fee of accountants, solicitors etc. In the -
proposal or project report, they look for the background and performance record of promoters, nature of
promoters business, summary of the project cost and the amount of money sought, information on loan
and bank facilities, other equity participants, details of government approvals required for the project and
their current status, details of management team and its experience, outline of product, market size,
strategy and marketing plan, summary of premises, production and general operations, financial
projections covering five years period, cash flow forecasts. Details of financial operations of the existing
group companies for last five years particularly audited figures and forecast for the current year are also
sought.

IFCI Venture also has a detailed Techno Economic evaluation and takes help of outside experts
whenever required. The format prescribed by them includes name and address of the organization, write
up on promoters and their background, particulars of the company structure, R & D set up, project /
feasibility report, market survey report, production process / technology, status / stage of development of
technology, advantages of the proposed project over existing products, scope of commercial exploitation,
proposed strategy for achieving the objective including specific approach for such tasks, as technology
inputs, design, development, prototype development and production, large scale production, testing,
evaluation, manufacturing arrangement for up gradation to commercial scald economic scale of

46
production, manpower development, market penetration and also likely constraints and how these are
proposed to be overcome; details of government‘s consents, cost of project and proposed means of
financing, organization chart for the company and the project, responsibility centers, bio-data of key
personals, sales forecasts, profitability projections, cash flow statements and amount and type of
assistance required from IFCI Ventures.

ICICI venture considers investment on the basis of four important aspects. First is the sound
management team whose members have established track records with displayed ability, dedication and
integrity. Second is the large and rapidly growing market opportunity. Scope for international marketing
of the product or service is considered an added advantage. Third is the long term competitive advantage
that would pose entry barriers to competition. This could be in terms of quality, performance or cost over
substitute and competitive products. Finally it is the potential for above average profitability leading to
attractive return over a longer period.

The criterions used by APIDC Venture Capital Fund in selecting the investee company include
several factors. The quality, depth, maturity and experience of management or exposure in the industry in
which the assisted concern proposes to implement the project are factored in. In case of project by first
generation entrepreneur, the experience, qualification and depth of knowledge of the relevant lines and
the efforts put in by the entrepreneur are considered. The other factors are innovativeness of the
technology / process, its advantage over the existing technology / process, the resultant benefits that may
accrue on account of the new technology and process; in case of existing products, the potential size of
the market with long term growth prospects, existence of clear demand supply gap over the period of
investment or advantage available to the assisted concern for marketing its product over its competitors;
in case of innovative product the competitive advantage of such product over existing products, the
potential for replacement and estimate of such replacement demand; in case of new products its
uniqueness and innovation to give competitive edge over the existing products.

IL&FS Venture Corporation considers market growth potential, management skills, technology,
quality consciousness, experience in the related field, commitment to the business and business ethics in
the order of priority. Their investment in a particular industry is based upon its growth potential, technical
innovation and rate of obsolescence.

With the maturity of venture capital industry the decision to invest now hinges on four criteria,
each of which must be satisfied before the venture capitalist commits his funds. A host of new breed
private sector and offshore funds during due diligence follow a four point criteria as under:

1. Fundamental analysis as to the soundness of the business.

2. Financial analysis of the prospect for the value of the business to grow.
3. Portfolio analysis is to determine whether the investment will fit into the venture capitalists ―basket‖ of
investments.
4. Disinvestment analysis to determine the mean time and a probable value of the investment upon exit.

1. Fundamental Analysis

47
 A detailed fundamental analysis of the enterprise and the industry is considered essential. The
fundamental analysis at the minimum should consider the following:

>A brief history of the company including date of incorporation and summery of progress to date.
> The quality, experience, strategy and motivation of the management, directors and existing
shareholders.
> A complete description of company‘s products or services. This considers the distinctive advantage or
unique selling points which is likely to lead to the company‘s success.
> The market which the company services, including size and nature of the industry, the size, location and
characteristics of customer base, potential competition and distinctive or any unique selling point.
>Manufacturing and operational aspects of business, including a description of technology employed,
access to sources of supply, manufacturing capacity and the premises owned or occupied.
>An objective analysis of the fundamental risk and the management‘s plan to cope with these.

2. Financial Analysis

Indian venture capital firms use financial analysis to look at the financial implications of the
company‘s strategy and to measure its performance. Venture capitalists use this to determine:

> The earning growth potential of the company.

> The sensitivity of these earnings to fluctuations in sales & margins and thus the risk associated with the
returns.
> The likely time lag between investments (e.g. Capital equipments, marketing etc,) and returns.
> The likely impact on cash flows, and possibility of having to make second or third round financing into
the Investee Company, which do not live up to their projections.
> The expected value of the company at the time of disinvestment.
> An objective analysis of the financial risk and management‘s plans to cope with them.

3. Portfolio Analysis

The initial investment decision also depends upon the venture capitalist‘s portfolio balance at the time the
investment proposal is being considered. That is the proposed investment must be an acceptable addition
to venture capitalist‘s portfolio in terms of its size, its stage of development, its geographic location and
its industry sector. Many venture capital firms avoid seed startup or early stage propositions for
fundamental reasons, while a growing number of venture capitalists are wary of irrational and depressed
IPO markets in India and hence avoid Buyout / Buyins.

4. Disinvestment Analysis

It is vital that the venture capitalist keeps his mind on exit at all times; clear idea as to the method,
the timing and the valuation of the company upon disinvestment. Indian venture capital funds have faced
maximum problem in this respect. Presently the exit plan is finalized and agreed upon before the venture
capital fund commits investment

48
 Till 1998 foreign venture capital funds were not convinced that money could be made in India
and concerns existed on the exit options, The successful exit of ICICI ventures and some other domestic
funds have acted as a trigger in attracting a number of foreign venture capital funds to India.

The other important practices relate to use of financing instrument and the process of monitoring
and value addition.

7.2 Structuring A Deal

During structuring a deal venture capital in India has faced two specific problems, namely:
Promoter share:
As venture capital is to finance growth, venture capital investment should ideally be used for
financing expansion of the ventures (eg. New plant, capital equipment, additional working capital etc.).
On the other hand, entrepreneurs may want to sell away a part of their own interests in order to book-in a
profit for their work in building up the company. In such case, the structuring often includes some vendor
shares, with the bulk of financing going to buying new shares to finance growth.

Handling director’s and shareholder’s loans:

In India a company often has an existing director‘s and shareholder‘s loans prior to inviting a
venture capitalist to invest. As the money from venture capital is put into the company to finance growth,
it is preferable to secure the deal to require these loans to be repaid back to the shareholders / directors
only upon IPOs / exits or at some mutually agreed period (say 1 Or 2 years after investment)
This increases the financial commitment of the entrepreneurs and the shareholders of the enterprise.

7.3 Financing Instruments

The type of financing available from the Indian venture capitalists was mainly equity or debt or a
combination of both. Due to the rigid rules in India, the Indian venture capital firms do not have the
flexibility that UK or US venture capitalists have in innovating new investment instruments. PACT and
TDICI (earlier versions of ICICI Ventures) were first to use ―royalty on sales‖ in Indian venture capital.
Herein the investee company is provided conditional loan that is serviced through a percentage of sales as
royalty if the venture succeeds and the amount is written off if it fails. Of late with the relaxation of the
regulation and the maturity of the venture capital industry innovative financing instruments are now
available. ICICI venture has introduced optionally and partially convertible debentures. Share warrants
have been used to bring down prices. ICICI and some other funds have provided bridge finance to the
assisted companies. Over the last five years Indian venture capitalists have become more flexible.

In the five year period 1993-98 venture capital investment in the form of non convertible debt has
reduced from 36 percent to 7 percent. Some funds invest using only one or two instruments; others use a
variety of instruments In India only 20 percent venture capital firms use just one type of instrument, while
30 percent use two types of instruments. A few funds use even five types of investment instruments.

49
7.4 Monitoring

All venture capitalists in India practice hands on active monitoring. 17 venture capital firms
provided information about their monitoring practice. 15 respondents claimed active monitoring while
one called its monitoring approach as proactive. Only one fund is believed to be following a passive /
hands off approach. ICICI Ventures follows a mid way approach. Almost all the domestic funds nominate
their representatives on the Board of Directors of the investee companies. Offshore funds are not that
particular about their nominee on the Board of the investee company, however they are very particular on
regular monitoring. In terms of value added services most of the Indian venture capital funds provide only
financial advice and a few of them provide management inputs. According to the views of the assisted
entrepreneurs the contribution of the nominee directors particularly from the public sector funds is
lacklustre except in the area of financial management. Very few funds are able to provide a real value
addition through networking. However some of the state sector venture funds do provide good support in
interfacing with state agencies and are helpful in arranging additional funds from state industrial
development and financial institutions.

Gujarat Venture Finance Ltd. supported Saraf Foods, an investee company in many ways — by
arranging for finance when the company was in need of it, getting technical problems sorted out when the
pilot project had teething problems. It stood behind Suresh Saraf, the promoter of Saraf Foods even while
the company was not making profits in the first couple of years. It also encouraged the company to
expand.3 DHL decided to go in for venture capital funding, its aim was not only to correct the debt equity
structure of the company but also find a partner who could help them introduce the best practices in
financial management. It wanted to hive off its international travel business and wanted to choose a
partner to do due diligence for it. It chose Bankers Trust as its venture capitalist which also helped DHL,
in Y2K compliance and in its financial management.

7.5 SOME OF VENTURE CAPITAL ORGANISATIONS

ICICI Venture Funds Management Company Limited

ICICI Venture (formerly TDICI Limited) was founded in 1988 as a joint venture with the Unit Trust of
India. Subsequently, ICICI bought out UTI's stake in 1998 and ICICI Venture became a fully owned
subsidiary of ICICI. ICICI Venture also has an affiliation with the Trust Company of the West (TCW),
which provides it a platform for networking Indian companies with global markets and technology.
Strong parentage and affiliates for ICICI Venture also translates into access to a broad spectrum of
financial and analytical resources thus enabling a keen understanding of the Indian financial markets and
entrepreneurial ethos.

IFCI VENTURE CAPITAL FUNDS LTD. (IVCF)

IFCI Venture Capital Funds Ltd. (IVCF) was originally set up by IFCI as a Society by the name of Risk
Capital Foundation (RCF) in 1975 to provide institutional support to first generation professionals and
technocrats setting up their own ventures in the medium scale sector, under the Risk Capital Scheme. In

50
1988, RCF was converted into a company, Risk Capital and Technology Finance Corporation Ltd.
(RCTC), when it also introduced the Technology Finance and Development Scheme for financing
development and commercialization of indigenous technology. To reflect the shift in the company's
activities, the name of RCTC was changed to IFCI Venture Capital Funds Ltd (IVCF) in February 2000.

 SIDBI Venture Capital Limited (SVCL)

SIDBI Venture Capital Limited (SVCL) is a wholly owned subsidiary of SIDBI, incorporated in July
1999 to act as an umbrella organization to oversee the Venture Capital operation of SIDBI. SVCL
mission is to catalyze entrepreneurship by providing capital and other strategic inputs for building
businesses around growth opportunities and maximize returns on investment. SVCL will manage the
various Venture Capital Funds launched/ being launched by SIDBI.

 IL & FS Group Businesses

IL&FS was incorporated in 1987, and commenced operations in May 1988 as a subsidiary of Central
Bank of India (CBI), one of the largest nationalized banks in the country. The initial shareholders were
the Unit Trust of India (UTI) and the Housing Development Finance Corporation Limited (HDFC). Thus,
from its inception, IL&FS inherited the experience and expertise of these institutions.

 Gujarat Venture Finance Limited (GVFL)

Started in July 1990, at the initiative of the World Bank, GVFL Ltd. is regarded as a pioneer of Venture
Capital in India. Over the past ten years, GVFL Ltd. has provided financial and managerial support to
over 57 companies with a high growth potential.

GVFL Ltd invests all over India and across industries. It has created a niche for itself in small and
medium scale companies. Investment and monitoring such companies require considerable effort and
involvement as compared to large projects. Over the last ten years GVFL Ltd. has been developing an
edge, dealing in such investments.

7.6 Where are VC’s Investing In India?

• IT and IT-enabled services

• Software Products (Mainly Enterprise-focused)
• Wireless/Telecom/Semiconductor
• Banking
• PSU Disinvestments
• Media/Entertainment
• Bio Technology/Bio Informatics
• Pharmaceuticals
• Electronic Manufacturing
• Retail

51
 Chapter 8

Current Trends in India

52
8 CURRENT TRENDS IN INDIA

8.1 Growth of VC in India

Venture capitals in India invest in the companies that fit into their criteria of investment stage, potential
yield and exit period. The actual choice varied with the venture capitalists depending upon their
investment strategies. The numbers of venture capital funds which are active in India are growing at a
rapid rate. Also the average investments which are made by capitalists are growing.

VC investment in India jumped 120% to $238 million in 2nd Quarter 08, driven by various deals
Bangalore, Mumbai and New Delhi (21 August 2008) — Venture capitalists invested some $928
million in 80 deals for entrepreneurial companies in India during 2007, according to the Quarterly India
Venture Capital Report. This was a whopping 166% increase over the $349 million invested in 36 deals
in 2006 and easily the highest total on record for the region.
The report found nearly 48% of all venture financing deals in India were for Information Technology (IT)
companies. The most popular recipients of venture capital in the IT industry were companies in the Web-
heavy ―information services‖ sector, which accounted for 22 deals and nearly $141 million in investment.
Among the deals in this area was the $10 million second round for Bangalore-based Four Interactive, an
online provider of local information on food, events, lifestyle, shopping and more.
According to the data, the overall business/consumer/retail industry saw 30 deals completed in 2007 and
more than $346 million invested, a 92% jump over the $180 million invested in 16 deals in the industry in
2006. As said, the business/consumer service area accounted for the bulk of the interest in this industry,
with 22 deals and $254 million invested.
India's health care industry, while still in its infancy, also saw increased investor interest in 2007 with
seven completed deals and nearly $100 million invested, more than double the $41 million invested in the
prior year. 79% of all deals in India were for seed and first rounds and a lot of these companies will
continue raising venture capital as they progress toward profitability and liquidity. And because the
majority of investment is going to early-stage companies, we aren't seeing ballooning deal sizes like those
in the U.S and Europe where investors are focused more on later-stage companies.‖
In fact, the median size of a venture capital round for companies India was $9 million in 2007, up slightly
from $8.7 million in 2006 but well below the $18.8 million median seen in 2005. Of all the companies in
India that received venture funding in 2007, nearly 73% were already generating revenues or profitable.

Issues and Challenges

Indian VC yet to be established as a sustainable asset class among institutional investors. Moreover a
limited amount of true ―risk-capital‖ impacts entrepreneurial activity.
Exit challenges exist mainly due to shallow capital markets and dull M&A environment for small
companies. Most importantly, India is yet to create a brand-name for IP-led companies, like Israel has
successfully done

53
8.2 No. of venture Firms in India

Here the venture capital industry is highly fragmented no one is market leader. The market for
industry‘s product or service is becoming more global, putting companies in more and more countries in
the same competitive arena. The industry is young and crowded with aspiring contenders. As in the year
2006 and 2007 the stock market of India was booming like anything thus more venture capital investors
and players were attracted towards industry, which can be seen from the chart given below. But in the
year 2008 because of sub-prime crisis the stock market has crashed and it affect adversely the venture
capital industry because the IPO is the main exit route for the venture capital industry and because of
current crash no one is coming with IPO. As there was high growth of stock market in the year 2006 and
2007 most of the VCs have entered in the market so now in crashed market every one is eager to sell their
services in small market of buyers. So the competition is very high at current stage.

www.nasscom.org, strategic review 2008 published by (National Association of Software and Service
Companies) Strategic review 2008

54
8.3 Top Venture Capital Investments

TOP VENTURE CAPTIAL INVESTMENT

8.4 Investment Pattern:

In venture capital industry, firms are investing on some basic criteria which they have decided by their
own requirement. Here some companies are investing in some particular industries and some of them
have also decided the stage of financing the company. So venture capital firm investing in early seed
stage does not directly compete with the firm investing in the later stage, one investing in LBO, MBO and
MBI deals. So the competition between stages is moderate while it is high within the stages. So the
overall competition is moderate to high

55
Company Seed stage Start up stage Early stage Later stage

IDBI venture 50 63 1 2
fund

ICICI venture 5 109 68 73

funds

SIDBI 5 19 2 3

RCTC venture 6 43 3 7
capital fund
scheme

CANBANK VC 2 40 3 13
fund LTD

Gujarat venture 0 7 0 8
capital funds
1995

Industrial 8 17 19 12
venture capital
Ltd.

( Source : Venture capital in India by “Satish Tanej”, “Galgotia publishing company”, Pg. No.245-288)

8.5 EFFECT OF GLOBALISATION:

Formerly whenever money was invested in a company, many factors were considered – the kind
of market available for the product, the economic viability, and its place in the stock market. Today
however globalization is a factor to contend with. The investors want to be the 1 st in the market to be
associated with something that is really ―hot‖ and are prepared to take the ―high risk‖ factor in their stride
because they know that it is likely to produce tremendously ― high returns‖. So because of less concerned
about other factors investors are looking only for the returns thus the competition among players is
moderate to high

56
FAST GROWING MARKET

Source : www.ivca.com

We can see from the chart that the market is growing at 43% CAGR. As we know market will grow only
if the demand for services is increasing which will attract new entrants to the market and will also led the
existing players think on the matter how to handle new entrants and how to compete with other existing
players. So the growth rate increases the competition among rivalry.

8.6 Emerging sectors:

In today‘s world new entrepreneurs are entering in businesses which lead to increase in competition and
also give arise to new emerging business which will need finance which can increase the scope of venture
capital. From the below given chart we can see that there is a huge investment opportunities for the
money suppliers. This can raise funds in market and will also increase the competition among existing
players.

57
 From the above we can say that competition among rivalry is moderate to high

8.7 Threat from substitutes:

Stages Early stage Start up stage Expansion stage

Substitute Angel investors IPO Bank

Friends & family Preference shares IPO

IPO Debentures Parent firms

Private Placements Bank loan FDI

Substitute at early stage financing : Here the substitute are angle investors, friends, family and here the
level of investment is very low, so no one is ready to take the money from venture capital firm. Threat
from substitute is high.

58
 CONTROL FINANCIAL BURDEN MANAGEMENT
SUPPORT

Angel investors NO LOW NO

Friends & Family NO LOW NO

IPO YES LOW NO

Private placement YES LOW NO

Venture capital YES HIGH YES

Here the venture capital is the only option providing management support to the business while the
financial burden is very low. It also have the control over the business. Thus, the mind set of Indian
entrepreneur can not accept the entry of venture capital funds in his business. So at early stage threats
from substitute is so high

Substitute at start up stage: Here the require huge capital for starting the business and that time there is
lot of risk. So the company collects the company through IPO rather than through Venture capital. Threat
from substitute is moderate.

CONTROL FINANCIAL BURDEN MANAGEMENT

SUPPORT

IPO YES LOW NO

PREFERENCE SHARES NO LOW NO

DEBENTURE NO MODERATE NO

BANK LOAN NO MODERATE NO

VENTURE CAPITAL YES HIGH YES

Here also the venture capital only is providing management support while the other options (IPO,
Debenture, Bank loan, Preference shares) can provide more management safety than VCs. Moreover it
also handover some management control to venture capitalist while other options except IPO provide full
freedom. Thus, venture capital doesn‘t fit according to Indian entrepreneur mindset. So threat from
substitute is moderate to high.

59
Substitute at Expansion Stage: Here the company wants to expand geographically and make merger and
acquisition with another company, and also make LBO, MBO/MBI deals so the requirement of
investment is very high and there is less risk and this stage company has good bargaining power because
the company is already developed and they can collect the money from any where. Nobody is ready to
give money to the company at this stage rather than venture capital.

Threat from substitute is low.

CONTROL FINANCIAL BURDEN MANAGEMENT

SUPPORT

BANK NO MODERATE NO

FDI MODERATE HIGH NO

IPO YES LOW NO

PARENT FIRM YES YES

VENTURE CAPITAL YES HIGH YES

At this stage the biggest substitute for the venture capital is FDI. Because at this stage firm requires a
huge capital for expansion and here the venture capital having only one competitive advantage over FDI
is management support provided by them. In all other sectors Venture capital firm and FDI are mostly
similar like control, financial burden and risk associated with them.

60
8.8 Indian scenario 2007

Contribution of funds to VENTURE CAPITAL

CONTRIBUTORS Rs. MILLION PERCENT

Foreign institutional 13,426.47 52.46

investors

All India financial 6,252.90 24.43

institutions

Multilateral development 2,133.64 8.34

agencies

Other banks 1,541.00 6.02

Foreign investors 570 2.23

Private sector 412.53 1.61

Public sector 324.44 1.27

Nationalized banks 278.67 1.09

Non resident Indians 235.5 0.92

State financial institutions 215 0.84

Other public 115.52 0.45

Insurance companies 85 0.33

Mutual funds 4.5 0.02

Total 25,595.17 100.00

61
Chapter 9

Exit Routes

62
9. Exit Routes
The voluntary exit can have four alternative routes for disinvestments:
 Buy back of shares by promoters or company
 Sale of stock (shares)
 Selling to a new investor
 Strategic / Trade sale

The ultimate objective of a venture capitalist is to realize his investment by selling off the same at a
substantial capital gain. Thus a venture capital firm converts the value of appreciation into cash. The
funds released are redeployed in supporting new ventures.

After the assisted unit has settled down to a profitable working and the enterprise is in a position to raise
funds through conventional resources like capital market, financial institution or commercial banks, the
venture capitalist liquidate their investment and make an exit from the investee company. In fact at the
time of making their investment, the venture capitalist plans their potential exit. This is usually done in
consultation with the promoters. In spite of the same, venture capitalists and entrepreneurs sometime
differ on the timings of the exit. As per a survey of the venture capitalists, when the assisted units are not
performing well and the venture capitalist wants to quit in order minimizing his losses, the entrepreneur
considers the venture capitalist's action as inappropriate and often tries to oppose the same.

It is important that at the time of investment venture capitalist makes it clear to the investee company that
he not only intends to sell his investment at a higher price with in a fixed period but also about his
realization horizon. A disparity in the expected realization horizons of the venture capitalist and the
entrepreneurs may lead to problems.

Divorce in venture capital is much more difficult and costly than in the domestic equivalent.

Expectation:

Venture firms vary in terms of their expectation; some prefer a shorter term prospective than others. Even
in one venture capital firm the exit period has been found to differ from venture to venture. It depends
upon a number of factors like type of industry, the stage of the investee company, extent of investment by
a venture capitalist, besides environmental factors like perceived competition, particularly future level bf
competition, technological obsolesce etc play an important role. Venture capital realization requires
patience as industry tends to be Cyclical and its fortunes fluctuate with the stock market, precisely IPO
market. Projects in some areas like Biotechnology take longer while Information Technology projects
particularly those related to internet have a shorter prospective for the venture capitalists. Early stage
financing normally takes a long term view of five to seven years for realization by the venture capitalist.

Obviously the Startup projects require a longer period to stabilize to a level where a trade sale or a public
issue of shares can be contemplated. Later stage financing has a shorter exit period of three to five years.
The time horizons and exact time of exit depends upon the style of the venture capital firm and its
perception of the market variables.

63
Preparations:

The investee company has to prepare and make suitable adjustments in its capital structure at the time of
realization by the venture capitalist. The convertible preference shares and convertible loans must be
converted to ordinary equity before the exit by the venture capitalist.

In case of non-convertible preference shares and loans by the venture capitalist these are to be redeemed.
The special debt instruments are normally payable at the time of sale or change of control. At exit the
special rights granted to the venture capitalist cease to operate and venture capital firms normally
withdraw their nominees from the board of the

Investee Company.

The venture capital firms have a motto 'exit at the maximum possible profit or minimum possible loss - in
case of a failed investment'. The exits can be voluntary or involuntary. Liquidation or receivership of a
failed venture is a case of involuntary exit. The voluntary exit can have four alternative routes for
disinvestment:

1. Buy back of shares by promoters or company

2. Sale of stock (shares)

3. Selling to a new investor

4. Strategic / Trade sale

9.1 BUY BACK I SHARES REPURCHASE

Buy back or Shares repurchase has following distinct forms:

i) The investee company is to buyback its own shares for cash from its venture capitalist using its internal
accruals.

ii.) The promoters and their group buys back the equity stake of the venture capitalist.

iii.)The employees' stock option trusts are formed which, in turn, buy the share holding of the venture
capitalist in the company. When the venture has settled down to a profitable state and the company or the
promoters have amassed sufficient capital through their venture and are constrained to grow through
market barrowing this option is preferred. The route is suited to Indian conditions because it keeps the
ownership and control of the promoters intact. Indian entrepreneurs are often very touchy about
ownership and control of their business. Hence in India, first a buy back option is normally given to the
promoters/ the company and only on their refusal the other disinvestments routes are looked into. The
64
option price of the shares is set at a level above the hurdle rate of the venture capitalist. The exact price is
mutually negotiated between the entrepreneur and the venture capitalist. The price is determined
considering - the book value of the shares, future earning potential of the venture, Price / Earning ratio of
similar listed companies. Till recently Indian companies were not allowed to buy back their shares, as a
result one of the popular exit routes was not available to venture capitalists in India. Recent Companies
(Amendment) Act,] 1999 enabled the companies to buy back their own shares and has opened this route.
A few deals have been struck by GVFC, ICICI venture and other venture capitalists. Even in UK the
companies were permitted buy back of their shares only in 1981. Buy back by the promoters had been the
most popular exit route. The problem however is the high rate of income tax, which makes it difficult for
Indian entrepreneurs to martial the necessary funds even in case of a highly successful venture. As a result
this option is less effective than the company buy back. Most venture capital rums include the buy back as
a part of the agreement at the time of investment. IFCI Ventures (RCTC) always had - a buy back by the
promoters - clause in its agreement with the assisted units. Canbank Venture Capital Fund has been
offering the entrepreneurs an opportunity to buy back the shares within the stipulated period at a
predetermined price. GVFL and IDBI also give an option to the promoters for buying their investment at
commercially determined rates before disinvesting. Even when venture capitalists have no intension of
exiting using this route, they consider it when the venture fails to achieve high growth and the return from
the investment is likely to be low /average.

The third option is buyback through employee's trust. Here in the trust can obtain funds through
contributions made by the employees and / or the company. It can also borrow from banks and other
institutions. Though it is popular in UK and US the same has not yet been tried in India. In the developed
economies of UK and US buy back route is used when the businesses have not performed well to attract
adequate valuation and sponsors for listing.

9.2 SALE ON SHARES ON THE STOCK EXCHANGE

The venture capitalist can exit by getting the company listed on the stock exchange and selling his equity
in the primary or secondary market using any of the three methods.

i.) Sale of shares on stock exchange after listing shares.

ii.) Initial Public Offer (IPO) / Offer for sale.

iii.)Disinvestment on OTC

Sale of Shares on Stock Exchange after Listing Shares

Venture capitalist generally invests at the start up stage and proposes to disinvest their holding after
company brings out an IPO for raising funds for expansion. This listing on stock exchange provides an
exit route from investment.

9.3 Initial Public Offer (IPO) Offer for Sale

65
When the existing entrepreneurs opt out of buy back, the venture capitalists opt for disinvesting their
stocks through public offering. More often this happens to be the first public offering by the investee
company. The world over it is the preferred exit option as it is beneficial to the promoters as well as the
venture capitalists. The major advantages are;

1. The public issue provides liquidity to the business, which is useful for the company.

2. The process establishes the fair price of the company's securities. Venture capitalist can obtain a higher
price for his equity and the same is useful for the promoters as it increases the valuation of the company.

3. Often the new stock is offered for sale rather than the venture capitalist's equity or sometimes a part of
venture capitalist's equity is clubbed with the new equity. This on one hand improves the companies net
worth and provides funds for growth and expansion, one the other enables the venture capitalists to get a
higher price of its equity after listing.

4. It paves the way for the company to raise funds for future growth, as it is easier and less costly for the
listed companies to raise capital from the market.

5. The company may get a tax break as listed compa.'1ies usually pay tax at a lower rate.

6. Public listed companies normally. have a higher credit rating, the growing companies will not have to
depend on internal accruals for financing expansion.

Several promoters have reservations to going public.

These include:

1. High cost of raising money through stock market. The cost includes underwriter‘s commission, the
expenses of merchant bankers, attorneys, auditors, printing and publicity besides listing fee of the stock
exchange. These costs have increased over the years.

2. Going public results in dilution of ownership. The original entrepreneurs have the additional task of
informing the new shareholders about the company's

activities and answering their quarries.

3. The disclosure requirements as per the listing agreement of the stock exchange and SEBI dissuade
some promoters. Those who feel uncomfortable giving information about the director's remunerations,
details of company's ownership or information about sales,

borrowings profits etc. may like to avoid public issue.

4. The listed companies are required to disclose sufficient information about their operations. The
competitor can abuse this information. The knowledge about the company's profitability sometimes leads
to labour problems with workers demanding higher wages.

5. Listed companies cannot keep their dealings with interconnected companies where promote have a
confidential interest undercover. This harms the promoter's interest.
66
It is preferred where venture is successful and its internal generations are adequate to meet immediate
fund for expension. Therefore no IPO is envisaged and instead a part of existing equity is offered for
sale.Disinvestment by a public issue is dependent on the ~tock market conditions particularly the primary
market. The stock markets are cyclic in nature. The state of the stock market, and its volatility acts as a
considerable deterrent to this option. During boom period when the stock market is raising it is easier to
disinvest by this route and the venture capitalist gets a higher price for its investment. When the market is
in recession floating the public issue is an undesirable exit route. However if the decision to go public has
been made, the venture capitalist would like to exit if he can get a good return on his investment. In case
he expects a much higher return by delaying the exit, he will wait longer.

During US stock market boom of 1991-96 the number of venture backed IPOs increased to 290 raising
$12.2 billion in 1996 and came back down to earth in 1997 with 138 companies raising almost $5 billion
and 78 companies raising $3.8 billion in 1998. Venture backed IPOs as a percent age of overall IPOs
dropped from 27 percent in 1997 to 22 percent in 1998.

In Europe the growth in the number of stock exchanges has contributed by providing more exit routes for
early and later stage investors. Stephen Schweich, Managing Director of BancBoston Roberston Stephens
International, which has completed 15 European equity offerings in technology sector during1999 feels
that IPOs are not best exit route for all investments. Initial public offering is the most glamorous and
visible type of exit for the venture capitalist in US, In the recent years technology IPOs have been in the
limelight during the IPO boom of last seven years. At public offering in US, the venture firm is
considered an. insider and will receive stock in the company, but the firm is regulated and restricted how
that stock can be sold or liquidated for several years. Once this stock is freely tradable, usually after two
years, the venture fund distributes this stock or cash to its investors who may then manage the public
stock as a regular stock holding or may liquidate it upon receipt. Over the last twenty-five3 years, almost
3000 companies financed by venture funds have gone public.

The listing requirements of Indian stock exchanges have posed a major hurdle for this exit route. Earlier
listing guidelines. required atleast 60 percent of the capital to be issued to public, and acted as a blockade
for effective retention of control in venture. The revised guidelines have reduced this to 25 percent for
general companies and 10 percent for Information Technology related companies. As a result IPOs are
becoming more popular with the entrepreneurs. The guidelines relating to minimum size of the paid up
capital is another barrier as most of the start up ventures particularly those re ated to software or IT fail to
meet the paid-up capital threshold of Rs. five crore at NSE and Rs ten crore at BSE. Venture capitalist in
such case hardly has an exit option from investment. Presently there is no organized system facilitating
the trading in the securities of private limited companies in the stock market. In India the share price
movements are generally driven by sentiments and have low level of fundamental support for the
company. Here the stock markets have not been rational. As a result investors either fail to realise the fair
value of their investment or get a bounty not supported by the intrinsic worth of investment. Under this.
Scenario, venture capital firms fail to realise true worth of their investment.

67
Disinvestments on OTC

An active capital market supports the venture capital activities. It enables the venture capitalists to get a
suitable valuation for their investment. Besides the regular stock exchange a well-developed OTC market
where dealers can trade in shares on a computer terminal imparts liquidity and breadth to the market. The
OTC market enables new and smaller companies not eligible for listing on a regular stock exchange to be
listed at an OTC exchange and thus provides liquidity to the investors. In US the National Association of
Securities Dealers Automated Quotation System (NA~DAQ) is an important OTC market. Presently over
eight thousand stocks are being provided liquidity by listing on NASDAQ. Today NASDAQ has a
concentration of technology stocks and is considered the hub of venture capital activity in US.

As per the recommendations of a number of committees, e.g. G S Patel committee on stock exchange
reforms, Abid Hussain committee on capital markets and Dave committee a Second Tier Stock Market,
an OTC exchange was required in India. As a result Over The Counter Exchange of India (OTCEI) was
established as a non-profit making company under section 25 of the Companies Act 1956. The companies
listed on the OTC Exchange enjoy the same status as companies listed on any other stock exchange.
OTCEI is owned by public sector financial institutions like UTI, IDBI, ICICI, IFCI, LIC, GIC, Canbank,
and SBI Caps. It brings .together investors and the companies seeking to raise funds.

It appoints dealers and members for this purpose. The OTCEI was expected to boost the venture capital
activity by motivating the closely held companies to go public

by shedding their fear of takeover. The flexibility of OTC trading system allowed trading of different
types of financial instruments. This provided greater flexibility to the venture capital firms in form of
innovative financing.

9.4 CORPORATE I TRADE SALE

The venture capital firm and the entrepreneur together sell the enterprise to a third party mostly a
corporate entity. Herein the promoters also exit from the venture along with the venture capitalist. This is
called a corporate, strategic or trade sale. When the venture has reaches a stable level of operations and
the entrepreneurs feel that they have proved their idea, many a times they may prefer to sell off their
ventures. The reasons for this sale can be varied, difficulty in running the venture profitably or a
perceived competition from more established big business houses having huge resources. In such
circumstances the venture is sold to a corporate having business synergy.

Trade sales are very popular in UK and US. This is in spite of the fact that stock markets for an lPO as
well as OTC are well developed in developed economies. Entrepreneurs with a solid ideas and revenue
models have been able to get much higher valuations through this route. This is so as the venture has
developed to a stage that the buyer has a clear prospective of the acquired venture's contribution to his

68
business. The sale of hotmail by Sabeer Bhatia to Microsoft for $ 400 million as against the. Valuation of
$ 200 million by the venture capitalist Dough Carlisle is a fine example. On the other hand, where
operations of an existing venture are modest, a higher exit valuation may be achieved in the market rather
than by a trade sale, as market investors are usually swayed by the appeal of the sector in which the
venture operates rather than the quality of its specific business operations. Cerent, a venture capital
funded company was sold to Ciaso Systems for an impressive $ 6.9 billion and Siara Systems, a company
producing fibre optic network equipment was purchased by Redback Network for a cool $ 4.3 billion.

Modalities: The modalities of the trade sale differ from case to case depending upon the nature and level
of operations, its size and the requirements of the buyer etc.

The sale can be in cash, against the shares of the acquiring company or a combination of the two. The
equity owners get the shares of buyer- company in lieu of the shares being sold by them. Such sales have
the advantage that the seller does not have to pay any tax as the transaction involves only the exchange of
the shares. Tax liability is deferred till the sale of shares acquired in exchange. Hotmail was exchanged
for 2,769.148 shares of Microsoft. There are occasions when the equity is sold by the owners against
notes to be received from the buyer. A part of the cost is paid in cash and for the balance the notes are
issued. These notes are often secured by the assets of the company and are redeemed at predetermined
intervals. The deferred payment through notes is popular as it helps in tax planning by the seller. The
appropriate disinvestments modalities of a corporate / trade sale depend on the needs of the seller and the
strengths of the buyer company besides keeping in view the tax considerations. At times this is through a
management buyout or buy in, which in turn may be financed partially by another venture capital.
Formalities involved in sale / transfer of enterprises have restricted smooth exit for venture capitalist.
Entrepreneurs and venture capitalist together find it difficult to sell / transfer the venture pending
completion of numerous procedural formalities. It is important to note that in India if the investee
company is a listed company at the time of trade sale, those the provisions of listing agreement are
attracted besides the provisions of SEBI regulations of merger and acquisitions are also applicable. All
corporate sales amount to merger, amalgamation and takeover and have to abide by the relevant
provisions of the Companies

Management Buy-outs are important in venture capital market for various reasons.

~ MBOs provide an opportunity to managers to become entrepreneurs.

~ Venture capital investment in buyout has a lower investment risk than early stage investments.

~ MBOs help smaller enterprises to adapt to technological changes. Venture capital buy-outs differ from
business buyouts as venture capitalists lay greater stress on active aftercare and due diligence than on
financial engineering or capability. Venture capitalist considers high risk and high reward with lower
price considerations and are more concerned about product or process development, which remains the
focus of their investment.

J C Verma7 classifies buyout into two types:

69
~ Corporate disposals or 'hire-downs': This form of buy-out envisages 100 percent sale of the business.
Such sale may be of business entity or the product alone or assets alone. The existing management
initiates the buy-out and retains a minor stake, but starts an independent enterprise. Such buyouts are
common in UK.

Venture capital buy-outs are both a successful investment strategy for venture capital investment as well
as an efficient exit route. Buy-out financed by another venture capitalist primarily by providing debt is
known as leveraged buy-out. Buy-out without participation by another investor is called management
buy-out. Here in the current management group purchases the stake of the venture capitalist. The stock
options and sweat equity have made management buy-out possible in India.

Buy-in is similar to buy-out but involves new management from outside and improvement in the
operations of the venture. Incoming new management is often unfamiliar with the operations of the
venture hence the acquiring company may feel that the continuity of the existing entrepreneur will be
beneficial of the business; the services of the original entrepreneur are retained. This helps in
implementing the remaining parts of the original ideas and also provides continuity to the venture. Bhatia
remained his company's top executive after it became a subdivision of Microsoft's Web basics.8 Buy-ins
differ from takeovers, as the acquirer in a buying is an individual or a group of individuals with the
experience of the same industry. He may be unfamiliar with the acquired business but has knowledge of
that type of business.

Merger and acquisitions in India are not very popular yet and market for mergers and acquisitions in India
is underdeveloped. This is primarily due to the mindset of Indian promoters to retain control on their
enterprises and lack of intent to maximize shareholders wealth. Hence merger and acquisitions do not find
favour and venture capital firms find it difficult to exit and more so through this route. Because of
lackluster IPO market in US, the number of privately owned venture backed companies being acquired
increased to 184 in 1998 with a total value of $7.9 billion as opposed to 162 companies in 1997 totalling
$7.6 billion. Merger and acquisitions has been the most successful exit route for venture instruments in
US9.

9.5 SELLING TO A NEW INVESTOR

Many a times for their exit venture capitalist and / or the promoters locate a new investor, a corporate
body or another venture capital firm. The new investors are normally those who find some sort of synergy
between the investee company and their existing operations such that the relationship is useful to both the
companies. When ever the new investor is a large or a well-known business entity, it provides credibility
to the investee company. This raises the valuation of the investment and the share prior of the company.
This increased valuation helps the investee company to raise further funds from the capital market at a
premium. Often the new investor purchases the additional shares from the secondary market, offering
better prices to the existing promoters and stakeholders and may acquire the control of the company. The
route is also used when the promoters want to get rid of the venture capitalist.

70
 New venture capital funds that have just begun their operations are often interested in buying the
ownership positions of the venture capitalist. Some venture capital funds, as a policy, concentrate their
activities to startups and early stage investments. Such venture capital funds exit paving way for the
venture capital funds specializing in latter stage investments or buyout deals. Often a growing venture
needs second stage financing, if the existing venture capitalist as a policy does not commit funds for the
second stage it normally locates another venture capital firm that finds this investment attractive enough
to enter. Here in besides buying in the stake of the original venture capitalist the new venture capital firm
also provides funds for the the major problem faced by the venture capital firms in India is a weak legal
framework that hardly discourages entrepreneurs from committing willful contravention of terms agreed
with venture capital firms. In such cases, venture capitalists find it difficult to seek legal remedy for
disinvestments of their investment. Due to the "reasons discussed above venture capitalists in India have
generally failed to envisage and implement a successful exit from their investment. Failure to get a proper
exit from investment has often been seen as a major hurdle to the growth of venture capital industry.
Transparency, disclosures and strong system of expediting transactions / deals. The prices of the stocks
should be driven by their performances and not by the sentiments.

9.6 PRE-REQUITE FOR THE EFFICIENT EXIT MECHANISM

A discussion with the executives of venture capital firms regarding the available exit routes and the
problems faced in disinvestments using these routes leads to the need for following pre-requisites for
efficient disinvestments by the venture capitalists.

L) Legal framework: A dedicated legal mechanism for the settlement of any dispute arising out of
investment by venture capitalist is to be provided by law. This is necessary since the legal framework in
India is very weak and has failed to resolve the disputes relating to terms of investment as agreed upon
between the entrepreneurs and the venture capital firms.

ii.) Smooth procedures for sale / transfer of enterprises: In order to facilitate the disinvestments by means
of a trade sale it is required that sale / transfer of an enterprise is facilitated at a price as close to the
intrinsic value of the firm as possible. The procedural formalities required for such transfer / sale should
be minimum possible so as to encourage the trade sales.

iii.) Efficient stock market: An efficient stock market is an important pre-requisite not only for the exit
route of stock market sale by a venture capital firm but also for an efficient determination of the intrinsic
value of the investment and the growth potential of the companies.

71
An efficient stock market should have adequate transparency, disclosures and strong system of expediting
transactions/deals. The prices of the stocks should be driven by their performances and not by the
sentiments.

iv.) Mechanism for listing and trading of equity of smaller companies: As discussed earlier most of the
investments by the venture capitalist are with the first generation technocrat entrepreneurs. The
companies assisted are smaller and fail to meet the minimum net worth criteria of stock exchange. OTC
exchange of India was set up for such companies with low equity base. However due to various reasons
activities of OTCEI did not pick up and it failed to meet its objectives. Necessary steps are required to
rejuvenate the working of OTCEI. A fully functioning OTCEI is a pre-requisite to provide an exit route
for investors (including venture capitalists) in small equity base companies. The fact remains that the
objective behind the venture capital investment is to help the assisted company establish itself, after that
the venture capital fund exits the investee company so as to reinvest the released capital in other
challenging and profit making opportunities. The scheduling of time and route for the exit determines
their disinvestments or exit strategy. The exit strategy aims at maximizing the post tax return of the
venture capital fund and depends on the tax laws.

RECENT DEVELOPMENTS

Ministry of Finance, Government of India has imposed two exit restrictions on venture capital funds in
India.

1. A venture fund incorporated in India would have to exit with in one year from a venture capital
undertaking (VCU) Le. an investee company going public and getting listed

on a stock exchange, but it could stay invested even after a year if it agrees to forgo its tax pass-through
benefit. This decision of the government sent a wrong signal to the nascent but growing venture capital
industry in India. Compulsory disinvestments within 12 months can be very harmful for the venture
capitalist if the stock market goes into a tailspin during this period. VCUs have a varying incubation
period even after the initial public offering. A venture capitalist normally makes an exit only after the
results of post IPO expansion, consolidation and the growth of the investee company are reflected in its
stock prices in the capital market. 2. A venture capital fund cannot exit before completion of one year in
an unlisted company. Government of India has removed these restrictions with effect from November
2000. Further SEBI has allowed the OTCEI to develop a trading window for unlisted securities where
qualified institutional buyers (QIBs} would be permitted to participate. This would enable the venture
funds ~ to exit from unlisted companies in which they have invested.

As per norms of RBI foreign venture capital funds could exit from an Indian company only at a price
worked out on the basis of a formula that came into effect during the time of the Controller of Capital and
was still valid. With effect from January 2001, foreign venture capital funds registered with SEBI are no
longer bound by a fixed exit price.

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PRESENT STATUS

The problem relating to disinvestments and exit in India has been that as compared to the nearly 400 odd
companies which have been invested in by Bank of America Equity the total number of exits have been
less than 40. Most of these exits have been possible during the boom year of 1999, which means that if
one excludes the exits in the boom years, almost no venture capitalist have had a cash return to show its
investors. TDICI (now ICICI Venture) had the similar problems.

Chapter 10

Advantages of VC over other forms of

finance

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10 Advantages of VC over other forms of finance:
It injects long term equity finance which provides a solid capital base for future growth.

The venture capitalist is a business partner, sharing both the risks and rewards. Venture capitalists are
rewarded by business success and the capital gain.

The venture capitalist is able to provide practical advice and assistance to the company based on past
experience with other companies which were in similar situations.

The venture capitalist also has a network of contacts in many areas that can add value to the company,
such as in recruiting key personnel, providing contacts in international markets, introductions to strategic
partners, and if needed co-investments with other venture capital firms when additional rounds of
financing are required.

The venture capitalist may be capable of providing additional rounds of funding should it be required to
finance growth.

10.1Disadvantages
Most venture capitalists seek to realize their investment in a company in three to five years. If an
entrepreneur‘s business plan contemplates a longer timetable before providing liquidity, venture capital
may not be appropriate. Entrepreneurs should also consider this.

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Chapter 11

Threats

75
11. THREATS:
 Venture Capital Market in India getting overheated

The Venture Capital market in India seems to be getting as hot as the country‘s famous summers.
However, this potential over exuberance may lead to some stormy days ahead, based on sobering
research compiled by global research and analysis services firm, Evalueserve. Evalueserve
research shows in interesting phenomenon is beginning to emerge:

Over 33 US-Based Venture capital firms are now seeking to invest heavily in start-ups and early
stage companies in India. These firms have raised, or are in the process of raising, an average of
US $100 million each. Indeed, if these 40-plus firms are successful in raising money, they would
garner approximately $4.4 billion to be invested during the next 4 to 5 years.Taking India
Purchasing Power parity (PPP) into consideration, this would be equivalent to $22 billion worth
of investment in the US. Since about $1.75 billion (or approximately 40% of $ 4.4 billion) has
been already raised, even if only $2.2 billion is raised by December 2006, Evalueserve cautions
that there will be a glut of venture capital money for early stage investments in India. This will be
especially true if the VCs continue to invest only in currently favorite sectors such as IT, BPO,
software and hardware products, telecom and consumer Internet. Given that a typical start-up in
India would require $9 million during the first three years, investing $2.2 billion during 2007-
2010 would imply investing in 150 to 180 start-ups every year during this period, which simply
does not seem practical if the VCs continue to focus only on their current favorite sectors.

 Unproductive workforce :

A global survey by Mckinsey & Company revealed that Indian business leaders are much more
optimistic about the future than their international peers. So Indian employees are tardy in their
job so it will effect reversely on the economic condition of the country. Because they are
unproductive to the economy of the country.

 Exit route barriers :

Due to crash down of market by 51% from January to November 2008. It creates a problem
for venture capital firms. Because Nobody is trying to come up with IPO and IPO is the exit
route door venture capital.

 Taxes on emerging sector:

As per Union Budget 2007 and broad guidelines, Government proposed to limit pass-through
status to venture capital funds (VCFs) making investment in nine areas. These nine areas are
biotechnology, information technology, nanotechnology, seed research and development, R
& D for pharma sectors, dairy industry, poultry industry and production of bio-fuels. Pass
through status means that the incomes earned by funds are taxable now.

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 Chapter 12

Case Studies on VC

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12. Case Studies on VC

12.1 Successful External Venture Investment by Nortel

Summary: From 1998 to 2001, Nortel invested in approximately 100 external start-ups through it's
partner venture capital firms, acquiring usually from 5 to 20% of each venture. Nortel has grown to
become a world market leader in telecommunications, voice, and data transmission. By the turn of the
century, Nortel owned up to 90% of the world market for its selected competence areas such as ten-
gigabit systems.

From 1998 to 2001, Nortel invested in approximately 100 external start-ups through it's partner
venture capital firms, acquiring usually from 5 to 20% of each venture
Value-added activities in the area of relationship management, screening and selecting strategic
investment opportunities, and the capacity for entrepreneur-friendly acquisitions allow Nortel's
business model to work effectively and with speed
Nortel maintains close ties with and invests through 7 to 8 carefully selected venture capital
(VC) firms that are at the forefront of creating new telecommunications service providers. These
firms make a network of relationships that makes visible 90-95% of what Nortel needs to know on
an ongoing basis. Nortel uses its side-by-side collaboration with VC firms to gain access to
entrepreneurs and ventures and to learn the skills of venture screening, valuating, investing and
monitoring
Occasionally, investments lead to acquisitions. However, usually Nortel has no intention of
acquiring the service providers; rather, it's aim is to learn and understand new business dynamics,
to cement relationships, to get access to new-generation technologies, to cut out its own
comparable research effort, to support OEMs, to share in the value created by its investments, or
to get some preferential rights.
Major acquisition made by Nortel in order to integrate critical disruptive technologies include
acquisition of Qtera, the leader in ten-gigabit fiber-optic technology, for $ 3.25 billion, and
acquisition of Bay Networks, manufacturer of LAN switches and other networking equipment, for
$ 9.1 billion.

The analysis of some firms studied are reported below:

12.2 TEJAS NETWORKS INDIA PVT. LTD.

The vision of Tejas Networks is to create state of the art products and solutions in the
telecommunications and optical networking arena. Tejas Networks was founded in 2000. Tejas
Networks developed software differentiated optical networking products that provide high price /
performance in their class, enabling carriers to maximize revenue generating services while
optimizing their overall network costs. Tejas Networks also partners with leading third party
equipment vendors to build intelligent optical networks for its customers.

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Founders and their experience: Sanjay Nayak is the Cofounder and Chief Executive Officer. He
worked as the Managing Director of Synopsis India. He had experience in working with
Synopsis, Viewlogic Systems and Cadence

Design Systems, in US. Dr. K.N.Sivarajan is the cofounder and Chief Technology Officer of
Tejas. He was a professor at Indian Institute of Science. He worked prior to this in IBM Watson
Research centre. He received his Ph.D from California Institute of Technology. Arnob Roy is the
third co-founder and earlier he worked with Synopsis India. The Tejas team consists of
outstanding professionals with a wealth of experience in deploying carrier class optical networks
in India and USA. Origin of the idea: Mr. Nayak and Dr. Sivarajan decided to create something
new for self-actualization. The wanted to create a world class product company, as they wanted
India to develop innovative telecom products. Mostly, Indian firms were in software services.
They wanted to create products from India. This urge made them seek venture capital as they had
innovative ideas.

Venture Investors: There were three venture investors for Tejas Networks in the

first round, and they are

· Mr. Gururaj Deshpande, Chairman of Sycamore

· Sycamore Networks, a publicly held corporation and

· ASG Omni LLC, a financial agency.

In the first round the three investors funded US$ 5 million. In the second round

Mr. Deshpande, Intel Capital and ILFS invested US$ 6.7 million. Intel Capital is the strategic
investment arm of Intel.

Products: The main products of Tejas are cost effective SDH Multiplexer equipments designed to
manage bandwidth and derive services from the optical core to access. Innovation in optical
networking requires high levels of software and hardware integration capabilities. Tejas has
undertaken the design and deployment of optical networks. Through innovation and learning
Tejas is able to compete with global firms like CISCO, Nortel and Lucent. Tejas combines the
cost advantage of India and the innovative strength of its founders. The optical products are based
on the dense wave diversion multiplexing and optical amplification to transmit data optically at

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aggregate rates exceeding one terabit per second over distances of a few thousand kms on a single
strand of fibre.

Tejas Networks India Ltd, an optical networking start-up launched its intelligent optical access
product in India in less than year after its start. Intel Capital announced funding after the product
was announced. The nine month company got immediately its first customer, Tata Power to
deploy the TJ-100 access product. This is the first intelligent optical network in India. The
system leverages the capacity creation of DWDM technology and innovative networking
software. With the Internet infrastructure market growing at about 20 percent per annum Tejas
Networks hopes to market its TJ 100 family of products in the global market. Venture funding
and value addition: Tejas Network is a knowledge integrator. The firm essential y develops
network software and markets Sycamore‘s optical networking products in India and the Asia
Pacific. It also develops some regionally specific networking products: The venture capital firms
supported Tejas in a number of ways:

· The name of Deshpande added reputation and acted as a non-traded externality to attracted
VCFs

· Intel capital helped in wetting the business plans

· ILFS helped in co-funding through its private equity arm and

· ASG-Omni helped in developing business contacts.

12.3 STRAND GENOMICS

Strand Genomics is a bioinformatics company, that develop innovative algorithms and solutions
in the field of bioinformatics. Stand‘s vision is to accelerate the drug discovery process by
developing a suite of products for genomics, proteomics and in silico-biology. Use of the state of
the art knowledge management solutions allow nuggets of knowledge to be extracted from a large
pool of data generated by high throughput technology. Though it is a new firm, it has been able to
get contract research from many global firms. It is likely to get its second stage funding. The
exact amount has not been announced.

Founders: A group of scientists and engineers from US and in India came together to
become a world leader in bioinformatics. The founders were computer scientists with
complementary skills in

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· clustering techniques

· Graphics and visualizations and

· stringology.

All the Board members have a Ph.D degrees and rich domain experience Dr. Vijay Chandru who
is a Professor of Biochemistry at Indian Institute of Science, came from MIT. The objective of
setting up Strand was to develop tools that leverage unique high-end computational skills.

Venture Funding: UTI Venture Funds picked up a 17.5 percent stake for an undisclosed sum. UTI
Venture funds picked up a 17.15 percent stake in strand after a thorough assessment. The second
stage funding is by Westbridge, an off- shore fund.

Product: Strand Genomics had launched two products ‗Soochika‘ is a micro-array knowledge
management tool and ‗sphatika‘ is an image classification software.

The objective is to provide a tool box that addresses the most common problems faced by drug
discovery scientists. The company has a total solutions approach to drug discovery.

The tools cover modules for

· visualization

· High dimensional data analysis

· Micro array analysis

· Intelligent drug prediction tools

· Protein modeling and

· sequence modeling and analysis tools.

Strategy: Within an year of its establishment it introduced a series of products.

Strand‘s business model is a combination of providing high-end services and building out a suite
of products called ‗Oyster‘ to improve the productivity of the drug discovery process. Strand uses
a service model that provides revenue on a continuous basis. For example, Strand entered into a
partnership with Gladstone Institutes to analyze complex micro array data. Strand will use its

81
proprietary data analysis techniques to analyze micro array data sets generated at Gladstone
Institute from experiments using Alzheimers disease related mouse models to identify certain
genes and associated regulatory networks. Strand also entered into partnership with Automated
Cel which is a disease phenotype driven drug discovery company. Strand provides advanced
algorithmic skill sets and software engineering skills to develop products and solutions for
Automated Cell‘s drug discovery platform which quantifies in vitro disease phenotypes for target
prioritization and validation and lead optimization in oncology and immune disease.

Strand is a unique company with skill sets normally not available. The senior team consists of a
group of scientists and problem solvers encompassing the areas of computer science and biology
with the requisite skills for drug discovery.

Strand focuses on solutions that have resulted in huge improvements in both productivity and
interpreting knowledge from genomic data. The solutions that strand provides are cost effective
and scalable and hence an unbeatable combination. Strand Genomics Cofounder Dr.R.Hariharan
is in the Technology Review TR100 list in 2002. The service oriented and long term partnership
relationships make Strands‘ model a fast growth and low risk model. The second stage funding
was announced recently.

12.4 AVESTHAGEN

Avesthagen is a fully integrated biotechnology and bioinformatics company setup primarily to

promote research and development services world wide making use of proven latest high-
throughput technologies and supported by a well trained research team. The vision of the
company is to improve the productivity in agriculture and develop agro-technologies that would
lead to value addition in food and pharma products. Avesthagen focuses on contract research for
global firms and it is a cost effective research firm in genomics. Research as a business concept it
has developed research competence.

Founder: The company was founded by Dr.Viloo Morawala Patel. He was awarded a
Ph.D in 1993 in plant molecular biology from the University Louis Pasteur, France and work
experience at University of Ghent, Belgium. She founded Avestha Gengzaine Technologies in
April 1998.

Origin of Idea: Dr Patell returned to India with high hopes and spun off Avesthagen in April
1998 with four employers using the technology developed by per at TIFR through the funding

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from Rockefeller Foundation. Avesthagen raised US$ 2 million as venture funding from ICICI
Ventures, Global Trust Bank and Tata Industries Ltd. The dream of Dr. Patel was to invent edible
vaccines and new plants using genomics.

Venture Capitalists: The three institutions that funded the first round (US$

1.5million) are:

· ICICI Venture Funds

· Global Trust Bank and

· Tate Industries Ltd

ICICI is one of the foremost investor and stakeholder in Avesthagen. GTB has offered a loan,
which was later, converted into Avesthagen equity. Tata Industries picked up a stake in
Avesthagen.

Avesthagen has engaged Kotak Mahindra and KPMG as investment bankers to facilitate the
process of raising the second round funding. Avesthagen is looking for a funding of $10 million
in the second round. In 2001-2002, Avesthagen has an income of US$ 1.5 million and it hopes to
breakeven this year and reach a revenue of US$ 10 million in five years.

Products and services: Avesthagen focuses on both products and services. This business model is
basically more robust, as services provide for a regular base revenue.

Avesthagen essential y provides four services:

· providing user friendly database application and management for life science companies

· providing new tools that allow the prediction of complex sequence at the gene and protein level
using customized algorithms and annotation tools.

· providing 3D fold structural insights to protein modeling

· providing clean vital data from a given bulk sequence.

Avesthagen has developed complimentary DNA libraries in 3 modules, namely standard cDNA
libraries, normalized and subtractive cDNA libraries Avesthagen was recently awarded a US
patent on a segment of rice DNA sequence. This well help them in enhancing the rice
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productivity. The second, thrust area is ‗edible vaccines‘. The vaccines will be made part of the
gene in a plant food product so that it can administered easily and in a cost effective manner.
This firm is one of the VC assisted firms that is focusing on creation of intellectual property. In
this case, venture firms helped in assessing the business model for its robustness.

12.5 ITTIAM SYSTEMS

Ittiam is positioned in the fastest growing segment of the core technology space:

Digital Signal Processing Systems: DSP Systems. The DSP chip market is about US$5 Billion in
the year 2000, growing at 30%. The market for DSP software and system design is about US$9
Billion growing at more than 50% per annum.

Founders and their dreams: Mr. Srini Rajam who was the head of Texas

Instruments India Ltd and six colleagues decided to create a world class technology company in
India. The drive to come together was the passion to create a world class technology company
seven people with 15 to 25 years of experience came together. The challenge was to create ―the
world‘s best DSP Systems Company‖. Mr. Srini Rajam was the head of TI India Ltd. TI India
was one of the most innovative companies in India as it topped the best companies operating in
India that were granted US patents in the year 2000.

Venture capital: Ittiam started in 2001 with a seed capital of US$ 5 million from Global
Technology Ventures. GTV is an investment arm of Sivam Securities and has an investment from
Bank of America. After that in the second round the Bank of America Fund offered US$ 5
million for another 6.6%, a price which value this start-up at a staggering $75 million.

Products: Within a year of their start, Ittiam has developed multiple products in all their target
domains. This includes video imaging and audio speech products in multimedia in addition to
wireless and wireline products in communication. Ittiam also announced its wireless products,
which are IEEE 802.11 based wireless LAN. Ittiam has developed solutions for both 802.11b
standard which has a bandwidth of 11MBPS and orthogonal frequency division multiplexing.

Ittiam will lead the new wave of global product companies from India. The company represents
the collective aspiration of the team to lead the new wave of Indian technology products thriving
in the global arena. Ittiam is singularly focused on Digital Signal Processor based systems in
wireline, wireless, audio speech and video-imaging products.

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Consistent with its bold vision, Ittiam is pushing the frontiers in all the key areas- business,
technology and people. In business, Ittiam has chosen to go beyond the traditional service model
and has committed itself to products, both customized and off the shelf technology. In
technology, Ittiam selected integration as its strategy-algorithm, software to the actual reference
board that resides in the end equipment. On the people front, Ittiam works with the fundamental
belief that the company is co-owned by all who work and share the dream-irrespective of the
function. The company gave shares to all its employees. Ittiam is one of the most innovative firms
operating in India with high quality intellectual property. DSP solution is implemented on a
generic platform. Ittiam has system focus and not chip focus. The platform integrates all the
interrelated domains. The company has a full fledged marketing group and it has entered into a
strategic partnership for overall solutions. In other words, Ittiam is a unique niche player with the
ability to innovate. There were no technologies companies in India and Ittiam positioned itself as
a technology company. The core competence of Ittiam is its capability to identify good windows
of opportunity. The five aspects that distinguishes Ittiam are

· experienced team

· Market focus

· World class orientation

· High level platform as the mode of integration, and

· Vision to a global leader in DSP design.

12.6 MINDTREE CONSULTING PVT. LTD

Mindtree is one of the fastest growing software companies operating in India.

Mindtree was selected as one of the best places to work in Information Technology. Mindtree was
one of the top 100 IT employers in the US within the third year of its establishment, according to
the Computerworld survey in 2002. It focuses on state of the art technologies and high level
reusable intellectual property.

Founders: A number of highly experienced persons from some of the best companies got
together and worked out a plan to start a new firm. The mission was charted out as: deliver

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business enabling solutions and technologies by creating partnerships with our customers in a
joyous environment for our people.

The logic of their getting together was that many of today‘s software services companies will not
be able to be leaders in the emerging future. Because, knowledge enabled software requires six
things to remain in the leadership position, namely:

· Domain capability

· Extensive use of tools

· Methodology

· Quality

· Innovation and

· brand positioning

Mr. Krishna Kumar was the chief Executive of Electronic Commerce Division, Wipro. Mr. Anjan
Lahiri, who was working with Cambridge Technology Partners is the Second Partner. Mr. N.S.
Parthasarathy General Manager, Wipro‘s Technology Solutions is the third partner. Rostow
Ravanan worked with Lucent Technologies and prior to that in KPMG. Mr Ashok Sootha who
was the chief Executive of Wipro is the Chairman of Mindtree. Kamran Ozair who worked with
Cambridge Technology Partners was another founder. Scott Staples was also with Cambridge
Technology Partners. Mr. Kalyan Banerjee who worked as the head of Wipro Technology
Solutions Division also joined the founding team.

Vision of 2005

The company set up a very ambitious and aggressive target:

· To achieve a revenue of $231 million

· To be among the top 10% in our business, in terms of profit & ROI

· To be one of the top 20 globally admired companies

· To give a significant portion of our PAT to support primary education.

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Venture Capitalists: The first round funding was by the Founders, Global

Technology Ventures and Walden International. The first round funding was US$ 9.5million. In
2001 August Mindtree secured the second round funding. This was US$ 14.1million and this was
by:

· Global Technology Ventures

· The founders

· Walden International

· Capital International and

· Franklin Templeton Fund.

Products and Services: Mindtree is essential y a services company. It operates in six thrust areas
namely,

· Internet Technologies

· Enterprise Integration and B2B

· ERP and supply chain management

· Mobile platform and technologies

· Application management and

· Setting up offshore development centers.

The strength of Mindtree is its ability to leverage its vast knowledge base to prescribe tools and
architectures which will work for specific business models and industries. The collective
experience, coupled with the creation of Mindtree Labs, ensures that the solutions will have high
quality and success. The focus of Mindtree unlike the other software firms have been to leverage
intellectual property. Mindtree helps firms to improve its product design life cycle. Mindtree
developed a set of intellectual properties to complement the product realization service offering.
These technology building blocks reduce the product design cycles and may be licensed as
individual reusable components. It has a multiplatform, multivendor approach to application
development. Mindtree established its own software engineering methodology namely:
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Distributed Rapid Architecture Development with quality. This methodology encompasses clear
processes and measurement criteria and captures organizational learning at all the stages of
product development, from concept to life cycle ownership. In three years time Mindtree evolved
into a multicultural and multinational organization.

The word Mindtree appears in ancient Indian literature, written in 4000BC meaning a source of
eternal intellect and wisdom for all who came in contact with it, because it springs from the mind.
In the interview with one of the founders he indicated that companies fail not because of market,
but lack of experienced teams. Mindtree has one of the best teams with strong business
leadership. The focus of the company has been on intensive learning. It works global firms and
mostly on difficult projects and newer state of the art areas. The main contribution of venture
capitalists has been the refinement and sharpening of the business plan.

12.7 NETWORK SOLUTIONS

Network Solutions was a Venture funded company. It focuses on convergence solutions to

network problems. It has become the preferred vendor for many firms for integrated data
networks. Mr.S.Sharma who started this was nominated for the outstanding Entrepreneur of the
year 2000 Award. It had an income of US$ 3 million in 1994 and it reached US$ 19 million in
2001.

Founder: Mr. Sharma is an electronic engineer. He worked with Motorola and HP for sometime.
Subsequent to this he implemented a number of independent projects in Asian countries such as
China, India, Singapore and Thailand. While working on these projects he started a networking
service firm for the multinationals operating in Bangalore. The main focus was designing
networks that are cost effective and reliable and identifying network architectures that are
reliable, secure, and cost effective and platform independent.

Venture capitalists: Intel capital acquired 15% of its stake in the first round funding. This
was for US$ 1.1 million. There was a sharp increase in its revenue after 1997. During the Internet
bust the management purchased the stake of Intel. Network Solutions is a private limited
company, presently.

Products and Services: Network solution provision is the business of the company. This has 800
people working. It is India‘s largest vendor independent network and telecom infrastructure
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solution provider. CISCO, Nortel, HP Cabletron are its major clients. The growth of revenue of
Network solutions is given Network Solution is a unique company as it is the largest vendor
independent network infrastructure solution provider. It has become the preferred solution
provider for the large banks as well as the stock exchanges in India though it is started by a single
entrepreneur. The uniqueness of the firm is that none of its customers have deserted it. The
company has a prudent debt planning policy and cost management system. The firm has three
domains of expertise and operates at 8 major centers in India.

It manages all aspects of the network lifecycle. Recently it has started providing call centre
support. It is one of five fastest growing IT companies in India according a survey conducted by
Computer Today. It maintains its revenue through services and retaining its client base. One of
the value added services it provides is software integration. The essence of learning has been
collaborative learning.

The venture support by Intel Capital helped Network Solutions in enhancing the reputation. The
support provided was mostly financial in nature.

12.8 REVA The electric car company

Reva is the India‘s first electric car designed by Reva Electric Car Company (RECC) and is the
short form for Revolutionary Electric Vehicle Alternative.

The vision of Reva is to establish a tradition of excellence and leadership in environment friendly
urban transportation by offering the best value and highest quality electric vehicles in the world.
Recently they have been able to get an export order from UK.

Founders Reva is the creation of the Maini group headed by Sudershan Maini.

Founded in 1973, the Maini Group is today a multi-product, multi-division, enterprise with
business interests ranging from manufacture of high precision products for the auto industry to
electric "in-plant" material handling equipment, from granites to abrasives and international
trading. Sudershan Maini nurtured the idea of a small car for India for 30 years but the idea
conceptualized and took a form only after Chetan Maini, his son joined Amerigon an U.S. based
company to work as a program manager on an Electric vehicle project. Chetan Maini who has a
B.S., (Mechanical Engg) from University of Michigan and M.S., (Mechanical Engg) from
Stanford University worked for General Motors (U.S.A.) and Amerigon group of Incorporation
(U.S.A.) before taking change as M.D. of Reva Electric Car Company Private Ltd. He was the
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 rd
team leader of the solar car team that won the GM sun race and stood 3 in the world solar
challenger in Australia. He was also the project leader for the hybrid electric car project at
Stanford University. Before taking charge as Managing Director of REVA Electric Car Company
(P) LTD has worked for General Motors (USA) and Amerigon Inc. (USA). Chetan Maini‘s
experience with Maini precision products, his core business, which produces high quality parts
for OEM‘s in India and overseas came very handy. The group got its first taste of electric
powered vehicles at Maini materials movement, which manufactures high tech equipment to
transport material people across shop floors. The company is committed to make available
facilities, which offer the customer maximum comfort at a minimal cost and make Reva the
vehicle of the future generation.

Origin of the Idea: Though the first electric vehicle was built in 1834, it was the internal
combustion engine that gained popular acceptance. Gasoline driven vehicles were faster and
cheaper with a greater range. Ready availability of petroleum products resulted in a further
drawback to the growth of electric vehicles. It was only in the 1970‘s when the world was hit
with the oil crisis, people realized the increasing need for alternative energy technologies for

automobiles. Growing concerns about environmental pollution only enhanced the interest in
Electric vehicles. Mr. Maini wanted to eliminate urban air pollution and he looked for new
technologies that can be cost effective. His dream was to develop the first electric car in India.
The REVA project was started in 1994.The first Reva proto type was ready in mid 1996. It was
internally funded. This prototype was displayed in Bangalore in 1996-97 after extensive testing
at the ARAI, Pune.

Evolution of the idea: RECC is a joint venture between Bangalore based Maini group and
Amerigon electronic vehicle technologies (A.E.V.T. Inc.) of U.S.A. Reva has built its reputation
on leading rather than following technological change. In line with their motto to introduce
technology ahead of the world to consumers in India the company has technical collaboration
with world-class companies. The company has collaboration with the following companies

Amerigon Electric Vehicle Technologies Inc., specializes in bringing

aerospace technology to the automobile industry. Curtis Instruments Inc., USA, is a

manufacturer of instrumentation, controls and integrated systems for electric vehicles of all types.
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This has developed the motor controller for the electric car Tudor India Limited, a subsidiary of
the largest and oldest Battery Company in the world (located in the USA), provided the Prestolite
batteries specially manufactured for use in the Reva‘s high-tech Power Pack.

Modular Power Systems USA, a division of TDI, is a world leader in Charger and Power
supplies. The Charger for Reva, which was developed by MPS, is now being made in India
through a technical collaboration agreement they have with the Maini Group. The main
contribution of RECC is designing, developing and manufacturing electric cars that are cost
effective and easy to manufacture.

Learning strategies: Maintaining quality had always been an important issue for the Maini
group. Modeled on the zero principle – zero defects, zero time delays and zero inefficiencies - the
Group has crafted a unique quality image for itself, both in India and abroad. The Maini group‘s
recognition for quality and reliability include the ISO- 9000 Certificate for 3 of its group
companies. All the components of Reva are thoroughly inspected and only after due verification
are forwarded to the next stage of manufacture. Even though the first prototype of Reva was
ready in Mid-1996, it was introduced in to the market only after extensive testing at the
Automobiles Research Association of India (A.R.A.I.),

Pune for homologation.

RECC‘s product quality and reliability have helped it to secure several International
collaborations that include General Motors U. S. and Bosch Germany.

R & D Strategy: The Maini group has always viewed technology and innovation as the main
driver of growth and profitability. The group has always focused on innovation, technology,
quality and reliability. The group has 2 in-house R&D Centers, recognized by D.S.I.R. (Dept of
Scientific and Industrial Research, Govt of India). Reva has a 25 strong R&D team which is
constantly striving to improve the quality of product it is working to come out with a new car by
the year-end.

The company is also working on an enviable project of drive system for General Motors. Keeping
in trend with the international standards REVA spends almost 8% of its turnover on R&D. The
R&D efforts have resulted in innovative technologies that are patented. Apart from its design
Reva deploys the following

3 key patent protected technologies in its electric car namely:

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· Running chassis,

· Energy management system, and

· Climate Control system.

Market dynamics: Majority of the capital equipment is indigenously available except for few
sophisticated machines. This battery could be charged using a 220-volt, 15-amp power source.
227-kg is the payload. Reva was developed as a completely indigenous car for India. Unlike
conventional internal combustion engine car which has more than 7000 component‘s Reva has
only 1000 components and more than 95% of these components are indigenously manufactured.
Few examples where RECC used their manufacturing philosophy innovatively are use of color-
impregnated panels to eliminate any painting at the assembly stage. This construction method
reduced capital costs by 40%. Opting for a thermo-formed (rather than injection-molded)
instrument panel, dispensed with curved glass and winding windows it selected conventional
lead-acid batteries rather than new-generation lithium types. The car is shown in Institutional
support: Reva received commendable support from the Department of Information Technology,
IISc. Bangalore. Reva also receives support from Maini Info Solutions, a subsidiary of the Maini
Group. On the financial front Reva received financial support from Technology Development
Board (India).

According to the company Government support for electric vehicle industry is not adequate. It is
appropriate that this venture receives the support of the government, since the technological
performance of the Electric vehicle largely meets the specifications. Technology Development
Board gave RECC a new venture loan of INR 185 million for the development and
manufacturing.

Organizational strategy: The marketing strategy is aimed at developing a whole new concept in
city mobility — non-polluting, noiseless, affordable personal transportation for all ages. The
company has targeted to sel 1,500-2,000 cars in 2002-2003. According to Mr. Maini, Electric cars
are appropriate in city environments due to increased mobility, zero pollution, less parking space
and quiet operation and it is particularly tailor-made for countries like India due to low running
and maintenance cost. The feedback shows that for most buyers, Reva is their second car, which
they prefer to use in-city, while their regular vehicle is used for long-distance trips. The company
is also working on a platform for larger electric cars.

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The deluxe version is expected to be launched by the end of this year while AC version, with 15-
20 per cent lower range than present 80 km, is also in the pipeline. The 75 team strong R&D team
at RECC is also working on heater version and another one with cooled seats. There are also
plans to expand the Reva platform by launching another vehicle by year-end. In the five years
since its inception, the Reva project has cost US$20 million, with an additional US$5 million to
put the car into production.

Features of REVA car are as follows:

· running cost of 40 paisa per km.

· priced at Rs 254000

· zero pollution car.

· Seat two adults and two children vehicle

· Easy driving as it has no clutch or gears.

· On a single charge, 'Reva' can be driven for 80 km.

· Two-door hatchback and

· Battery life span of 40,000 km which should last for 3-4 years in city driving

conditions.

Learning from the case study: The case was aimed at understanding the electric vehicle
industry in general and Reva Electric Car Company in particular. This study on Reva gave an
understanding as to how a company could leverage technology to indigenously develop world
class products. This innovative creation from the Maini group was tremendously helped by
Chetan Maini‘s previous experience in electric vehicular technology. This is one of the biggest
funded projects that is supported by TDB.

12.9 OBSERVATIONS

The venture capital industry has started creating innovative firms in India. During the last five
years many new entrepreneurial firms have ventured into new product development and contract
research for global firms. Till then Indian firms weak in new product development. Firms like

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Avesthagen, Strand Genomics and Bharat Biotechnics have achieved high revenue levels through
revenue from contract research as well. Firms like Tejas Networks, Reva and Ittiam have become
product developers for the global market. Mindtree has grown rapidly by focusing on new high
technology business segments. Venture Capital assisted firms are still in its infancy.
Management buyouts and external corporate venturing have started emerging indicating that off-
shore funds are started considering India as a potential opportunity. This will reduce the capital
gap for entrepreneurial firms. Major observations are given below:

1. Venture Capital is becoming a major mechanism for stimulating innovation and entrepreneurial
growth. In India, this is catalyzed by the rapid growth in information technology. There is a
strong need to enhance availability of venture capital in developing countries as most of these risk
averse but awareness about the role of venture capital has been very limited. There has to be
systematic initiatives for simulating entrepreneurship through use of venture funds. The
distortions in the capital market due to over regulations and multiple controls are also a problem
that is hindering the growth of VCs.

2. Expertise needed for managing new ventures and managing venture funds is yet to evolve in
India. Most of the off-shore Funds have a strong experiential base that is absent in local
institutions. Off-shore Funds have been able to provide support and business contacts. From the
personal interviews it is evident that off-shore funds are able to add more value to the venture
assisted firms through the provision of help in preparing reliable and precise business plans.
Entrepreneur‘s general y focus on technical aspects and not on business success. Venture
capitalists brings the balance between business and technology so that innovation becomes a
commercial success.

3. Most of the new ventures have benefited from venture capital, especially those supported by
the off-shore funds. Three aspects of support provided by VCF that adds value are:

· monitoring the business plans

· Support for getting business contacts from other countries and

· bringing an external perspective in the business plan.

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4. Venture capital growth and industrial clustering have a strong positive correlation. Foreign
direct investment, starting of R&D centers, availability of venture capital and growth of
entrepreneurial firms are getting concentrated into five clusters. The cost of monitoring and the
cost of skill acquisition are lower in clusters, especially for innovation. Entry costs are also lower
in clusters. Creating entrepreneurship and stimulating innovation in clusters have to become a
major concern of public policy makers. This is essential because only when the cultural context is
conducive for risk management venture capital will take-of. Clusters support innovation and
facilitates risk bearing. VCs prefer clusters because the information costs are lower. Policies for
promoting dispersion of industries are becoming redundant after the economic liberalization.

5. An analysis of venture assisted firms clearly shows that the factors contributing to the success
of innovative firms are essentially three fold, namely

· Strong experiential base

· Vision and urge to achieve something and

· A realistic business plan.

6. Bank operated venture capital funds are relatively risk averse and they have a weak
experiential base. Local funds are focusing on software services and retail business but not
innovative products. The real growth of venture capital in India started after the entry of off-shore
venture funds. India has become a preferred destination of venture funds in Asia.

7. The presence of an excellent academic research institutions is a prerequisite for the success of
venture firms in a location as it can provide high quality manpower. In the case of Bombay,
Madras, Hyderabad, Bangalore and New Delhi the presence of research institutions have
facilitated the growth of venture supported firms.

8. One of the untraded externalities that stimulate venture growth is idea entrepreneurship. Idea
moves faster and evolves quickly in clusters.

Venture capital growth has occurred in clusters in India like in US, Israel,

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UK and Taiwan.

9. In developing countries venture funds are not fully evolved and, it may be necessary to start
public venture funds. Public venture funds can act as seeds of entrepreneurship. Special attention
may be essential for this so that commercial and technical perspectives are integrated. In
developing countries public policy should support and evolve institutional systems for stimulating
public venture funds. The government supported quasi-venture fund, namely Technology
Development Board has been effective in stimulating innovations in India. Good corporate
governance of venture funds is one of the critical success factors that has helped Technology
Development Board to select and support innovations.

To sum up, developing countries have to harmonize the capital market requirements and venture
capital needs so that they can stimulate entrepreneurial firms that focus on high-tech innovations.
Though most of venture funds state that high technology is their priority only firms started by
experienced persons find support by VCFs. Capability for assessing venture projects continues to
be a weak area in the case of developing countries such as India because of the lack of prior
experience.

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 Chapter 13

Contemporary Issue in Venture Capital

Industry

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13. Contemporary Issue in Venture Capital Industry

 IIM-A Eyes venture capital to fund its incubators

 Buoyed by the growing tribe of students wanting to go solo with their own
entrepreneurial venture, the Indian Institute of Management, Ahmedabad (IIM-A) is
looking to attract venture capital funds to the campus. The premier management institute
is also in talks with several corporates to provide seed capital to budding entrepreneurs
from its incubation lab.
 ―The number of students starting up their own venture is increasing in every batch. In a
batch of 250 students, at least 10-15 are starting their own ventures.

Source: Business Daily from “THE HINDU” group of publications

Sunday, 27, 2008

 Angel investors betting big on Indian start-ups

 Amid a slowdown in global venture capital investments, Indian start-up firms are
emerging as clear favourites for seed capital among global angel investors.
 During the first quarter of 2008, US-based venture capitalists invested $350 million in 38
deals in India, a 42 per cent jump from previous quarter, when $246 million was invested
in 33 companies. In the case of China, the funding by US-based Venture Capital firms
dipped 24 per cent to $250 million invested in 32 firms during the first quarter of 2008,
down
From the $331 million invested in 39 deals in the previous quarter, according to data
from the Money Tree report from price water house coopers and the US-based National
Venture Capital Association

Source: Business Daily from “THE HINDU” group of publications

Saturday, April 26, 2008.

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CONCLUSION

The study provides that the maturity if the still nascent Indian Venture Capital market is imminent.

Venture Capitalists in Indian have notice of newer avenues and regions to expand. VCs have moved
beyond IT service but are cautious in exploring the right business model, for finding opportunities that
generate better returns for their investors.

In terms of impediments to expansion, few concerning factors to VCs include; unfavorable political and
regulatory environment compared to other countries, difficulty in achieving successful exists and
administrative delays in documentation and approval.

In spite of few non attracting factors, Indian opportunities are no doubt promising which is evident by the
large number of new entrants in past years as well in coming days. Nonetheless the market is challenging
for successful investment.

Therefore Venture capitalists responses are upbeat about the attractiveness of the India as a place to do
business.

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BIBLIGROPHY

BOOKS:

1. Taneja Satish, “ Venture Capital In India”, Galgotia Publishing Company, 2002

2. Pandey I M, “Venture Capital – The Indian Experience”, Prentice Hall of India pvt. Ltd,1999.

REPORT:

1. Trends of Venture Capital in India, survey report by Delloitte,2007.

2. Global Trends of Venture Capital, Survey report by Deloitte,2007.
3. Economic survey 2007-08, Chapter-8

WEBSITE:

www.sebi.gov.in
www.ivca.org
www.nenonline.org
www.indiavca.org
www.vcindia.com
www.ventureintelligence.in
www.vccircle.com
www.indiape.com
www.nvca.org
www.nasscom.org
www.Economictimes.indiatimes.com
www.100ventures.com
www.msme.com
www.planningcommission.nic.in

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