Blackbook Project on Venture Capital

8/11/2019 Blackbook Project on Venture Capital

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VENTURE CAPITAL IN INDIA

CHAPTER 1

INTRODUCTION


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The Venture capital sector is the most vibrant inustr! in the "inancial mar#et toa!$

Venture capital is mone! provie b! pro"essionals %ho invest alon&sie mana&ement

in !oun&' rapil! &ro%in& companies that have the potential to evelop into

si&ni"icant economic contributors$ Venture capital is an important source o" e(uit! "or

start)up companies$

Venture capital can be visuali*e as your ideas and our money concept o" evelopin&

business$ Venture capitalists are people %ho pool "inancial resources "rom hi&h net %orth

iniviuals' corporate' pension "uns' insurance companies' etc$ to invest in hi&h ris# + hi&h

return ventures that are unable to source "uns "rom re&ular channels li#e ban#s an capital

mar#ets$ The venture capital inustr! in Inia has reall! ta#en o"" in$ Venture capitalists not onl!

provie monetar! resources but also help the entrepreneur %ith &uiance in "ormali*in& his ieas

into a viable business venture$

Five critical success factors have been identified for the ro!th of "C in India# na$el%&

The re&ulator!' ta, an le&al environment shoul pla! an enablin& role as internationall!

venture "uns have evolve in an atmosphere o" structural "le,ibilit!' "iscal neutralit! an

operational aaptabilit!$

Resources raisin&' investment' mana&ement an e,it shoul be as simple an "le,ible as

neee an riven b! &lobal trens$

Venture capital shoul become as institutionali*e inustr! that protects investors an

investor "irms' operatin& in an environment suitable "or raisin& the lar&e amounts o" ris#

capital neee an "or spurrin& innovation throu&h start)up "irms in a %ie ran&e o" hi&h

&ro%th areas$


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In vie% o" increasin& &lobal inte&ration an mobilit! o" capital it is important that Inian

venture capital "uns as %ell as venture "inance enterprises are able to have &lobal

e,posure an investment opportunities$

In"rastructure in the "orm o" incubators an R . D nee to be promote usin&

&overnment support an private mana&ement as has success"ull! been one b! countries

such as the U/' Israel an Tai%an$ This is necessar! "or "aster conversion o" R.D an

technolo&ical innovation into commercial proucts$

0ith technolo&! an #no%le&e base ieas set to rive the &lobal econom! in the comin&

millennium' an &iven the inherent stren&th b! %a! o" its human capital' technical s#ills' cost

competitive %or#"orce' research an entrepreneurship' Inia can unleash a revolution o" %ealth

creation an rapi economic &ro%th in a sustainable manner$ o%ever' "or this to happen' there

is a nee "or ris# "inance an venture capital environment' %hich can levera&e innovation'

promote technolo&! an harness #no%le&e base ieas$

The concept o" Venture capital is ver! recent as compare to U/A' U' Europe' Israel etc$

Venture Capital "unctions %ere run b! evelopment "inancial institutions such as the ID3I

4Inustrial Development 3an# o" Inia5'ICICI 3an#' an /tate 6inancial corporations$ Publicl!

raise "uns %ere the main source o" Venture Capital$ This source o" "inancin& %as ho%ever

threatene b! mar#et "its7 va&aries an "ollo%in& the raisin& o" minimum pai up capital

re(uirements "or bein& liste at stoc# e,chan&es' problems %ere in store "or small "irms %ith

"easible pro8ects$92:

The ;th "ive !ear plan as %ell as the "iscal polic!o" the ;- also "ostere venture capital as a source o" "unin& ne%

entrepreneurs an technolo&! %hich %as &iven b! the report o" the Committee on Development
http://en.wikipedia.org/wiki/Industrial_Development_Bank_of_Indiahttp://en.wikipedia.org/wiki/ICICI_Bankhttp://en.wikipedia.org/wiki/ICICI_Bankhttp://en.wikipedia.org/wiki/Indian_Venture_Capital_Association#cite_note-2http://en.wikipedia.org/wiki/Fiscal_policyhttp://en.wikipedia.org/wiki/Fiscal_policyhttp://en.wikipedia.org/wiki/ICICI_Bankhttp://en.wikipedia.org/wiki/Indian_Venture_Capital_Association#cite_note-2http://en.wikipedia.org/wiki/Fiscal_policyhttp://en.wikipedia.org/wiki/Industrial_Development_Bank_of_India


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CHAPTER '

ORI(IN OF

"ENTURE

CAPITA)


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The stor! o" venture capital is ver! much li#e the histor! o" man#in$ In the "i"teenth centur!'

Christopher Columbus sou&ht to travel %est%ars instea o" east%ars "rom Europe an so

planne to reach Inia$ is "ar) "etche iea i not "in "avour %ith the in& o" Portu&al' %ho

re"use to "inance him$ 6inall!' Fueen Isabella o" /pain ecie to "un him an the vo!a&es o"

Christopher Columbus are no% empanelle in histor!$ An thus evolve the concept o" Venture

Capital$

The moern venture capital inustr! be&an ta#in& shape in the post 0orl 0ar 2$ It is o"ten sai

that people ecie to become entrepreneurs because the! see role moels in other people %ho

have become success"ul entrepreneurs because the! see role moels in other people %ho have

become success"ul entrepreneurs$ Guch the same can be sai about venture capitalists$ The

earliest members o" the or&ani*e venture capital inustr! ha several role moels' incluin&

these three H

A$erican Research and Develo*$ent Cor*oration&

6orme in 1>?' %hose bi&&est success %as Di&ital E(uipment$ The "ouner o" ARD %as

?' one o" those earl! hits %as Ginute Gai 8uice$ Koc# 0hitne! is consiere

one o" the inustr!@s "ouners$


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The Roc/efeller Fa$il%&

L / Roc#e"eller' one o" those earliest investments %as in Eastern Airlines' %hich is no% e"unct

but %as one o" the earliest commercial airlines$

The Inian Private E(uit! an Venture Capital Association %as establishe in 1>>- an is base

inNe% Delhi' the capital o" Inia$ IVCA is a member base national or&ani*ation that represents

Venture capitalan Private e(uit!"irms' promotes the inustr! %ithin Inia an throu&hout the

%orl an encoura&es investment in hi&h &ro%th companies$ It enables the evelopment o"

venture capital an private e(uit! inustr! in Inia an to support entrepreneurial activit! an

innovation$ The IVCA also serves as a po%er"ul plat"orm "or investment "uns to interact %ith

each other$ In 2' the total amount o" private e(uit! an venture capital in Inia reache

U/;$ billion across 2>> eals$91:

IVCA members comprise Venture capital "irms'Institutional investors'3an#s'3usiness

incubators' An&el investor &roups' 6inancial avisers'Accountants'La%!ers'


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CHAPTER 0

EANIN( OF

"ENTURE CAPITA)


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Venture Capital is e"ine as proviin& see' start)up an "irst sta&e "inance to companies an

also "unin& e,pansion o" companies that have emonstrate business potential but o not have

access to public securities mar#et or other creit oriente "unin& institutions$

Venture Capital is &enerall! provie to "irms %ith the "ollo%in& characteristicsH

Ne%l! "loate companies that o not have access to sources such as e(uit! capital an7or

other relate instruments$

6irms' manu"acturin& proucts or services that have vast &ro%th potential$

6irms %ith above avera&e pro"itabilit!$

Novel proucts that are in the earl! sta&es o" their li"e c!cle$

Pro8ects involvin& above)avera&e ris#$

Turnaroun o" companies

Venture Capital erives its value "rom the bran e(uit!' pro"essional ima&e' constructive

criticism' omain #no%le&e' inustr! contactsB the! brin& to table at a si&ni"icantl! lo%er

mana&ement a&enc! cost$

A Venture Capital 6un 4VC65 strives to provie entrepreneurs %ith the support the! nee to

create up)scalable business %ith sustainable &ro%th' %hile proviin& their contributors %ith

outstanin& returns on investment' "or the hi&her ris#s the! assume$

The three primar! characteristics o" venture capital "uns %hich ma#e them eminentl! suitable as

a source o" ris# "inance areH

That it is e(uit! or (uasi e(uit! investment

It is lon& term investment an

It is an active "orm o" investment$


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"enture ca*italists

0hen someone re"ers to venture capitalist' the ima&e that comes in min is Gr$ Gone! ba&s$ 0e

all thin# o" venture capitalists as someone %ho is sittin& on millions o" ollars an %ho %ith the

%ave o" his ma&ic %an turns !our reams into realit!$ 0ell' i" that@s %hat !ou thin# is all about

%h! run a"ter him + pla! /anta !oursel"J

Venture Capitalists is li#e an! other pro"essional %ho is pai "or oin& his 8ob' !es' venture

capitalist is nothin& but a "un mana&er %hose 8ob is to mana&e "uns that are raise$ A venture

capitalist &ets a "ee to invest in companies that interest his investors$

Difference bet!een a "enture Ca*italist and 2an/ers3one% anaers,

3an#er is a mana&er o" other people@s mone! %hile the venture capitalist is basicall! an

investor$

Venture capitalist &enerall! invests in new venturesstarte b! technocrats %ho &enerall! are

in nee o" entrepreneurial ai an "uns$

Venture capitalists &enerall! invest in companies that are not liste on an! stoc# e,chan&es$

The! ma#e pro"its onl! a"ter the compan! obtains listin&$

The most important i""erence bet%een a venture capitalist an conventional investors an

mutual "uns is that he is a specialist an lens mana&ement support an also

6inancial an strate&ic plannin&

Recruitment o" #e! personnel

Mbtain ban# an ebt "inancin&

Access to international mar#ets an technolo&!


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Introuction to strate&ic partners an ac(uisition tar&ets in the re&ion

Re&ional e,pansion o" manu"acturin& an mar#etin& operations

Mbtain a public listin&$

"ENTURE CAPITA) F)O- CHART&


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CHAPTER 4

AD"ANTA(E5 AND

DI5AD"ANTA(E5

OF "ENTURE

CAPITA)


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/ome avanta&es o" venture capital areH

15 Venture Capitalists 4VCs5 can provie a relativel! lar&e amount o" capital be"ore a

compan! &oes public$

25 Gan! VCs provie mana&erial or technical avice "or companies the! invest in$

-5 /uccess"ul VCs brin& le&itimac! to ne% ventures the! invest in$

?5 VCs ma! attract other investors$

/ome isavanta&es o" venture capital areH

15 The cost o" venture capital is hi&h$

25 Venture Capitalists are not patient investorsB per"ormance must meet or e,cee

e,pectations %ithin a speci"ic time$

-5 VCs are #no%n to ta#e control o" uner)per"ormin& companies$


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CHAPTER 6

"ENTURE

CAPITA) IN INDIA


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Institutionali7ation of "C in India

To establish the process o" institutionalisation o" Venture Capital 6unin& 4VC65 in Inia it is

important to e,amine the &ro%th o" this inustr! %ithin the conte,t o" the lar&er political an

economic s!stem$

The evelopment o" the venture capital inustr! in Inia in the 1>@s seeme almost utopian$

Inia@s hi&hl! bureaucratise econom!' a conservative social an business outloo# an a ris#

averse "inancial s!stem provie little encoura&ement an institutional space "or the venture

capital inustr! to avance$

The earliest mention o" venture capital came in 1>;-$ A committee appointe b! the Inian

&overnment to e,amine the promotion o" evelopment o" /GE@s hi&hli&hte the nee to enorse

venture capital as a source o" "unin& ne% entrepreneurs an technolo&!$

The Inian econom! is a ualistic econom!' ominate b! a "e% massive Public /ector

Unerta#in&s 4P/U@s5 on the one han an private sector inustr! &iants such as the Tatas an

3irlas on the other$ An entrepreneur startin& a sunrise inustr! %oul have to o so on his o%n

personal savin&s or loans raise throu&h personal contacts an "inancial institutions$

In 1>' the 0orl 3an#' encoura&in& economic liberali*ation in thir %orl countries'

unertoo# a stu! to e,amine the possibilit! o" evelopin& venture capital "unin& chie"l! in the

private sector$ Accorin&l!' the Inian &overnment issue its "irst &uielines to le&alise venture

capital operations$ The! allo%e state controlle ban#s an "inancial institutions to establish

venture capital subsiiaries$ As a result venture capital "unin& became an e,tension "or

evelopin& "inancial institutions such as ICICI' ID3I' /ID3I' an /tate 6inance Corporations$


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In the absence o" an inepenent an or&ani*e venture capital inustr! in Inia until almost

1>>' iniviual investors an evelopmental "inancial institutions pla!e the role o" venture

capitalists$ Entrepreneurs %ere lar&el! epenent on private placements' public o""erin&s an

lenin& b! "inancial institutions$

The ro!th of the venture ca*ital industr% in India can be divided into '

*hases,

The first *hasebe&an post +re"orm %ith liberali*ation o" the Inian econom!$ The Technical

Development an In"ormation Corporation o" Inia 4TDICI' no% ICICI ventures5 an the

> "or overseas investment in venture capital in Inia$

In 1>>' the /ecurities an E,chan&e 3oar o" Inia 4/E3I5 came out %ith &uielines "or

venture capital "uns$ The move liberate the inustr! "rom a number o" bureaucratic hassles an

pave the %a! "or &reater access to capital$ Goreover' competition brou&ht pro"essional business

practices "rom the mature mar#ets in the %est$


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In 1>>;' venture capital "unin& became prominent in the IT sector$ All venture capital "uns that

%ere as o" then bein& emplo!e in other sectors' chan&e their "ocus to the IT an Telecom

inustr!$

0ith the IT boom toa!' the Inian venture capital inustr! has "inall! turne the curve$

o%ever it is still strivin& har to success"ull! an %holl! ta#e o""$

Durin& the recession "rom 1>>> + 21 most o" the venture capitalists either close o%n or

shi"te "ocus$ Almost all o" them %ith the e,ception o" one or t%o li#e


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There are a number o" "uns' %hich are currentl! operational in Inia an involve in "unin&

start)up ventures$ Gost o" them are not true venture "uns' as the! o not "un start)ups$ 0hat

the! o is provie me**anine or bri&e "unin& an are better #no%n as private e(uit!pla!ers$

o%ever' there is a stron& optimistic unertone in the air$ 0ith the Inian #no%le&e inustr!

"inall! sho%in& si&ns o" reainess to%ars competin& &loball! an a%areness o" venture

capitalists amon& entrepreneurs hi&her than ever be"ore' the sta&e seems all set "or an overrive$

The Inian Venture Capital Association 4IVCA5' is the noal center "or all venture activit! in the

countr!$ The association %as set up in 1>>2 an over the last "e% !ears' has built up an

impressive atabase$ Accorin& to the IVCA' the pool o" "uns available "or investment to its 2

members in 1>>; %as Rs2$bn$ Mut o" this' Rs1 bn ha been investe in >1 pro8ects$

Certain venture capital "uns are Inustr! speci"ic4ie the! "un enterprises onl! in certain

inustries such as pharmaceuticals' in"otech or "oo processin&5 %hereas others ma! have a

much %ier spectrum$ A&ain' certain "uns ma! have a &eo&raphic "ocus + li#e Uttar Praesh'

Gaharashtra' erala' etc %hereas others ma! "un across i""erent territories$ The "uns ma! be

either close)eneschemes 4%ith a "i,e perio o" maturit!5 or open)ene$ The &ro%th o"

venture capital in Inia "rom 2)2 is as "ollo%sH


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As in the above chart' it is observe that venture capital ha a &reat "all "rom 2 to 2- "rom

U/ 2 million to U/ million$ 2? %as a &oo start "rom venture capital in Inia$ An

there more chances o" increase in venture capital in Inia$

These are venture capitalcompanies in Inia$

Accel Partners Inia

Artheon Ventures

Artiman Ventures

Au&ust Capital Partners

3lueRun Ventures

D6K Inia

Epiphan! Ventures

elion Venture Partners
http://en.wikipedia.org/wiki/Venture_capital_financinghttp://en.wikipedia.org/wiki/Venture_capital_financinghttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/w/index.php?title=Accel_Partners_India&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Artheon_Ventures&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Artiman_Ventures&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=August_Capital_Partners&action=edit&redlink=1http://en.wikipedia.org/wiki/BlueRun_Ventureshttp://en.wikipedia.org/w/index.php?title=DFJ_India&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Epiphany_Ventures&action=edit&redlink=1http://en.wikipedia.org/wiki/Helion_Venture_Partnershttp://en.wikipedia.org/wiki/Venture_capital_financinghttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/w/index.php?title=Accel_Partners_India&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Artheon_Ventures&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Artiman_Ventures&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=August_Capital_Partners&action=edit&redlink=1http://en.wikipedia.org/wiki/BlueRun_Ventureshttp://en.wikipedia.org/w/index.php?title=DFJ_India&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Epiphany_Ventures&action=edit&redlink=1http://en.wikipedia.org/wiki/Helion_Venture_Partners


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I6CI Venture Capital 6uns

Inia Innovation Investors

In"raCo Asia Development Pte Lt$

Inventus 4Inia5 Avisor! Compan!

KA6CM Asia

Net* Capital

Ne,us Inia Capital

Nirvana Venture Avisors

M8as Venture Partners

Reliance Venture

/AI6 Partners

/e(uoia Capital

/ri8an Capital

Tuscan Ventures

Trient Capital

Veis Ventures

VentureEast

Lambtech Ventures
http://en.wikipedia.org/w/index.php?title=IFCI_Venture_Capital_Funds&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=India_Innovation_Investors&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Inventus_(India)_Advisory_Company&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=JAFCO_Asia&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Netz_Capital&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Nexus_India_Capital&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Nirvana_Venture_Advisors&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Ojas_Venture_Partners&action=edit&redlink=1http://en.wikipedia.org/wiki/Reliance_Venturehttp://en.wikipedia.org/w/index.php?title=SAIF_Partners&action=edit&redlink=1http://en.wikipedia.org/wiki/Sequoia_Capitalhttp://en.wikipedia.org/w/index.php?title=Tuscan_Ventures&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Trident_Capital&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Veddis_Ventures&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=VentureEast&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Lambtech_Ventures&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=IFCI_Venture_Capital_Funds&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=India_Innovation_Investors&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Inventus_(India)_Advisory_Company&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=JAFCO_Asia&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Netz_Capital&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Nexus_India_Capital&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Nirvana_Venture_Advisors&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Ojas_Venture_Partners&action=edit&redlink=1http://en.wikipedia.org/wiki/Reliance_Venturehttp://en.wikipedia.org/w/index.php?title=SAIF_Partners&action=edit&redlink=1http://en.wikipedia.org/wiki/Sequoia_Capitalhttp://en.wikipedia.org/w/index.php?title=Tuscan_Ventures&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Trident_Capital&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Veddis_Ventures&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=VentureEast&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Lambtech_Ventures&action=edit&redlink=1


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CHAPTER 8


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T9PE5 OF

"ENTURE

CAPITA)

IN"E5TOR5


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The :venture funds; available could be fro$

Incubators

Anel investors

"enture Ca*italists


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The INDU/ Entrepreneurs 4TiE5 is a classic &roup o" an&els li#eH Vino ham' /ailesh Gehta'

an%al Re#hi' Prabhu


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Invest into proven7establishe businesses

ave "inancial partnersJ approach

Invest bet%een U/D ) 1 million

CHAPTER ?

C)A55IFICATION

OF "ENTURE

CAPITA) FUND5


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"enture funds in India can be classified on the basis ofH

2ase for$ation

Financial Institutions Led By ICICI Ventures, RCTC, ILFS, etc.

Private venture "uns li#e Inus' etc$

Re&ional "uns li#e 0arbur& Pincus' K6 Electra 4mostl! operatin& out o" on& on&5$

Re&ional "uns eicate to Inia li#e Draper' 0alen' etc$

M""shore "uns li#e 3arin&s' TC0' /3C' etc$

Corporate ventures li#e Intel$

To this list %e can a An&els li#e /ivan /ecurities' Atul Cho#se! 4e, Asian Paints5 an others$

Gerchant ban#ers an N36Cs %ho speciali*e in bou&ht out eals also "un companies$ Gost

merchant ban#ers le b! Enam /ecurities no% invest in IT companies$

Invest$ent Philoso*h%

Earl! sta&e "unin& is avoie b! most "uns apart "rom ICICI ventures' Draper' /ID3I an

An&els$ 6unin& &ro%th or me**anine "unin& till pre IPM is the se&ment %here most pla!ers

operate$ In this conte,t' most "uns in Inia are private e(uit! investors$

5i7e Of Invest$ent

The si*e o" investment is &enerall! less than U/1mn' U/1)mn' U/)1mn' an &reater than

U/1mn$ As most "uns are o" a private e(uit! #in' si*e o" investments has been increasin&$

IT companies &enerall! re(uire "uns o" about Rs-)?mn in an earl! sta&e %hich "all outsie


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"unin& limits o" most "uns an that is %h! the &overnment is promotin& schemes to "un start

ups in &eneral' an in IT in particular$

"alue Addition)

The venture "uns can have a totall! hans on approach to%ars their investment li#e Draper

or hans o"" li#e Chase$ ICICI Ventures "alls in the limite e,posure cate&or!$ In &eneral'

venture "uns %ho "un see or start ups have a closer interaction %ith the companies an avice

on strate&!' etc %hile the private e(uit! "uns treat their e,posure li#e an! other liste

investment$ This is partiall! 8usti"ie' as the! ten to invest in more mature stories$

A list o" the members re&istere %ith the IVCA as o" Kune 1>>>' has been provie in the

Anne,ure$ o%ever' in aition to the or&ani*e sector' there are a number o" pla!ers operatin&

in Inia %hose activit! is not monitore b! the association$ A to&ether the in"usion o" "uns b!

overseas "uns' private iniviuals' Oan&el@ investors an a host o" "inancial intermeiaries an

the total pool o" Inian Venture Capital toa!' stans at Rsbn' accorin& to inustr! estimates

The primar! mar#ets in the countr! have remaine epresse "or (uite some time no%$ In the last

t%o !ears' there have been 8ust ;? initial public o""erin&s 4IPMs5 at the stoc# e,chan&es' leain&

to an investment o" 8ust Rs1?$2?bn$ That@s less than 12Q o" the mone! raise in the previous t%o

!ears$ That ma#es the conservative estimate o" Rs-bn investe in companies throu&h the

Venture Capital7private E(uit! route all the more si&ni"icant$

/ome o" the companies that have receive "unin& throu&h this route inclueH

Gaste#' one o" the olest so"t%are houses in Inia


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/FL /tar' !eraba base trainin& an so"t%are evelopment compan!

Gicrolan' net%or#in& har%are an services compan! base in 3an&alore

/at!am In"o%a!' the "irst private I/P in Inia

initron' ma#ers o" embee so"t%are

Po%erTel 3oca' istributor o" telecomputin& proucts "or the Inian mar#et

Rei"" on the Net' Inian %ebsite "eaturin& electronic shoppin&' ne%s' chat' etc

Entevo' securit! an enterprise resource mana&ement so"t%are proucts

Planetasia$com' Gicrolan@s subsiiar!' one o" Inia@s leain& portals

Torrent Net%or#in&' pioneer o"


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Inus Lea&ue Clothin&' a compan! set up b! ei&ht "ormer emplo!ees o" rea!mae

&arments &iant Gaura' %ho set up shop on their o%n to evelop a uni(ue virtual

or&ani*ation that %ill license &lobal apparel brans an sell them' %ithout o%nin& an!

manu"acturin& units$ The! ream to buil a net%or# o" 2' outlets in three !ears

an to be amon& the top three rea!mae brans$

/hoppers /top' Gumbai@s premier epartmental store innovates %ith retailin& an

ecies to &o &lobal$ This eal is "acin& some problems in &ettin& re&ulator!

approvals$

Air"rei&ht,the courier)compan! %hich has been &ro%in& at a rapi pace an neee

"uns "or heav! investments in technolo&!' net%or#in& an aircra"ts$

Pi**a Corner' a Chennai base pi**a eliver! compan! that is set to ta#e on &lobal

&iants li#e Pi**a ut an Dominos Pi**a %ith its innovative servicin& strate&!$

Consortiu$ financin

0here the pro8ect cost is hi&h 4Rs 1 million or more5 an a sin&le "un is not in a

position to provie the entire venture capital re(uire then venture "uns mi&ht act in

consortium %ith other "uns an ta#e a lea in ma#in& investment ecisions$ This

helps in iversi"!in& ris# but ho%ever it has not been ver! success"ul in the Inia

case$


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CHAPTER @

5TA(E5 OF

FINANCIN( 29


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"ENTURE

CAPITA)I5T


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Venture capital can be provie to companies at different staes$ These inclueH

I, Earl% stae Financin

5eed Financin& /ee "inancin& is provie "or prouct evelopment . research an to

buil a mana&ement team that primaril! evelops the business plan$

5tartu* Financin&A"ter initial prouct evelopment an research is throu&h' startup

"inancin& is provie to companies to or&ani*e their business' be"ore the commercial launch o"

their proucts$

First 5tae Financin& Is provie to those companies that have e,hauste their initial

capital an re(uire "uns to commence lar&e)scale manu"acturin& an sales$

II, EB*ansion Financin

5econd 5tae Financin& This t!pe o" "inancin& is available to provie %or#in& capital

"or initial e,pansion o" companies' that are e,periencin& &ro%th in accounts receivable an

inventories' an is on the path o" pro"itabilit!$

e77anine Financin& 0hen sales volumes increase tremenousl!' the compan!'

throu&h me**anine "inancin& is provie %ith "uns "or "urther plant e,pansion' mar#etin&'

%or#in& capital or "or evelopment o" an improve prouct$


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CHAPTER

CORPORATE

"ENTURIN(


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"ENTURE CAPITA) PROCE55 CHART

Even thou&h investor an the entire process that &oes into the %ooin& the venture capital %ith

!our plan$

6irst' !ou nee to %or# out a business plan$ The business plan is a ocument that outlines the

mana&ement team' prouct' mar#etin& plan' capital costs an means o" "inancin& an

pro"itabilit! statements$
http://www.indiainfoline.com/bisc/veca/ch13.htmlhttp://www.indiainfoline.com/bisc/veca/ch13.htmlhttp://www.indiainfoline.com/bisc/veca/ch13.html


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The venture capital investment process has variances7"eatures that are conte,t speci"ic an var!

"rom inustr!' timin& an re&ion$ o%ever' activities in a venture capital "un "ollo% a t!pical

se(uence$ The t!pical sta&es in an investment c!cle are as belo%H


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plans in orer to ma#e three or "our investments in a !ear$)It is important to note the i""erence

bet%een the pro"ile o" the investment opportunities that a venture capital %oul e,amine an

those pursue b! a conventional creit oriente a&enc! or an investment institution$ 3!

e"inition' the venture capital investor "ocuses on opportunities %ith a hi&h e&ree o" innovation$

The eal "lo% composition an the techni(ue o" &eneratin& a eal "lo% can var! "rom countr! to

countr!$ In Inia' i""erent venture capital "uns7companies have their o%n methos var!in&

"rom promotional seminars %ith R.D institutions an inustr! associations to irect avertisin&

campai&ns tar&ete at various se&ments$ A clear pattern bet%een the investment "ocus o" a "un

an the constitution o" the eal &eneration net%or# is iscernible even in the Inian conte,t$

II Due Dilience

Due ili&ence is the inustr! 8ar&on "or all the activities that are associate %ith evaluatin& an

investment proposal$ It inclues carr!in& out re"erence chec#s on the proposal relate aspects

such as mana&ement team' proucts' technolo&! an mar#et$

The important "eature to note is that venture capital ue ili&ence "ocuses on the (ualitative

aspects o" an investment opportunit!$ It is also not unusual "or venture capital "un7companies to

set up an Oinvestment screen@$ The screen is a set o" (ualitative 4sometimes (uantitative criteria

such as revenue are also use5 criteria that help venture capital "uns7companies to (uic#l!

ecie on %hether an investment opportunit! %arrants "urther ili&ence$ /creens can be

sometimes elaborate an ri&orous an sometimes speci"ic an brie"$

The nature o" screen criteria is also a "unction o" investment "ocus o" the "irm at that point$

Venture capital investors rel! e,tensivel! on re"erence chec#s %ith Oleain& li&hts@ in the speci"ic

areas o" concern bein& aresse in the ue ili&ence$


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A venture capitalist tries to ma,imi*e the upsie potential o" an! pro8ect$ e tries to structure his

investment in such a manner that he can &et the bene"it o" the upsie potential ie he %oul li#e to

e,it at a time %hen he can &et ma,imum return on his investment in the pro8ect$ ence his ue

ili&ence appraisal has to #eep this "act in min$

Ne% 6inancin&

/ometimes' companies ma! have e,perience operational problems urin& their earl! sta&es o"

&ro%th or ue to ba mana&ement$ These coul result in losses or cash "lo% rains on the

compan!$ /ometimes "inancin& "rom venture capital ma! en up bein& use to "inance these

losses$ The! avoi this throu&h ue ili&ence an scrutin! o" the business plan$

Inter)Compan! Transactions

0hen investments are mae in a compan! that is part o" a &roup' inter)compan! transactions

must be anal!*e$

III Invest$ent "aluation

The investment valuation process is an e,ercise aime at arrivin& at Oan acceptable price@ "or the

eal$ T!picall! in countries %here "ree pricin& re&imes e,ist' the valuation process &oes throu&h

the "ollo%in& stepsH

Evaluate "uture revenue an pro"itabilit!

6orecast li#el! "uture value o" the "irm base on e,perience mar#et capitali*ation or

e,pecte ac(uisition procees epenin& upon the anticipate e,it "rom the investment$

Tar&et an o%nership position in the investee "irm so as to achieve esire appreciation on the

propose investment$ The appreciation esire shoul !iel a hurle rate o" return on a

Discounte Cash 6lo% basis$


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/!mbolicall! the valuation e,ercise ma! be represente as "ollo%sH

NPV S 94Cash574Post5: , 94PAT , PER5: , #' %here

NPV S Net Present Value o" the cash "lo%s relatin& to the investment comprisin& out"lo% b!

%a! o" investment an in"lo%s b! %a! o" interest7iviens 4i" an!5 an reali*ation on e,it$ The

rate o" return use "or iscountin& is the hurle rate o" return set b! the venture capital investor$

Post S Pre Cash

Cash represents the amount o" cash bein& brou&ht into the particular roun o" "inancin& b!

the venture capital investor$

OPre@ is the pre)mone! valuation o" the "irm estimate b! the investor$ 0hile technicall! it is

measure b! the intrinsic value o" the "irm at the time o" raisin& capital$ It is more o"ten a matter

o" ne&otiation riven b! the o%nership o" the compan! that the venture capital investor esires

an the o%nership that "ouners7mana&ement team is prepare to &ive a%a! "or the re(uire

amount o" capital

PAT is the "orecast Pro"it a"ter ta, in a !ear an o"ten a&ree upon b! the "ouners an the

investors 4as oppose to bein& Oarrive at@ unilaterall!5$ It %oul also be the net o" pre"erre

iviens' i" an!$

PER is the Price)Earnin& multiple that coul be e,pecte o" a comparable "irm in the

inustr!$ It is not al%a!s possible to "in such a Ocomparable "it@ in venture capital situations$

That necessitates' there"ore' a si&ni"icant e&ree o" 8u&ement on the part o" the venture capital

to arrive at alternate PER scenarios$

O#@ is the present value interest "actor 4corresponin& to a iscount rate Or@5 "or the investment

hori*on$


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It is (uite apparent that PER time PAT represents the value o" the "irm at that time an the

complete e,pression reall! represents the investor@s share o" the value o" the investee "irm$ The

"ollo%in& e,ample illustrates this "rame%or#H

E,ampleH 3est Gousetrap Limite 43GL5 has evelope a protot!pe that nees to be

commerciali*e$ 3GL nees cash o" Rs2mn to establish prouction "acilities an set up a

mar#etin& pro&ram$ 3GL e,pects the compan! %ill &o public in the thir !ear an have

revenues o" Rs;mn an a PAT mar&in o" 1Q on sales$ Assume' "or the sa#e o" convenience

that there %oul be no "urther aition to the e(uit! capital o" the compan!$

Pruent 6un Gana&ers 4P6G5 propose to lea a s!nicate o" li#e mine investors %ith a

hurle rate o" return o" ;Q 4iscounte5 over a "ive !ear perio base on 3GL@s sales an

pro"itabilit! e,pectations$ 6irms %ith comparable sales an pro"itabilit! an ris# pro"iles trae at

12 times earnin&s on the stoc# e,chan&e$ The "ollo%in& %oul be the se(uence o" computationsH

In orer to &et a ;Q return p$a$ the initial investment o" Rs2 million must !iel an accumulation

o" 2 , 41$;5S Rs-2$mn on isinvestment in !ear $

3GL@s mar#et capitali*ation in "ive !ears is li#el! to be Rs 4; , $1 , 125 million S Rs?mn$

Percenta&e o%nership in 3GL that is re(uire to !iel the esire accumulation %ill be 4-2$7?5

, 1 S ->Q

There"ore the post mone! valuation o" 3GL At the time o" raisin& capital %ill be e(ual to

Rs427$->5 million S Rs$1 million %hich implies that a pre)mone! valuation o" Rs-$1 million "or

3GL

Another popular variant o" the above metho is the 6irst Chica&o Getho 46CG5 evelope b!

/tanle!


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probabilit! %ei&hte to arrive at an e,pecte rate o" returnHIn realit! the valuation o" the "irm is

riven b! a number o" "actors$ The more si&ni"icant amon& these areH

Mverall economic conitionsH A buo!ant econom! prouces an optimistic lon&) term outloo# "or

ne% proucts7services an there"ore results in more liberal pre)mone! valuations$

Deman an suppl! o" capitalH %hen there is a surplus o" venture capital o" venture capital

chasin& a relativel! limite number o" venture capital eals' valuations &o up$ This can result in

unhealth! levels o" lo% returns "or venture capital investors$

/peci"ic rates o" ealsH such as the "ouner@s7mana&ement team@s trac# recor' innovation7

uni(ue sellin& propositions 4U/Ps5' the prouct7service si*e o" the potential mar#et' etc a""ects

valuations in an obvious manner$

The e&ree o" popularit! o" the inustr!7technolo&! in (uestion also in"luences the pre)

mone!$ Computer Aie /#ills /o"t%are En&ineerin& 4CA/E5 tools an Arti"icial Intelli&ence

%ere one time arlin&s o" the venture capital communit! that have no% &iven place to biotech

an retailin&$

The stanin& o" the iniviual venture capital 0ell establishe venture capitals %ho are

sou&ht a"ter b! entrepreneurs "or a number o" reasons coul &et a%a! %ith ti&hter valuations than

their less #no%n counterparts$

Investor@s consierations coul var! si&ni"icantl!$ A stu! b! an American venture capital'

OVentureMne@' reveale the "ollo%in& tren$ Lar&e corporations %ho invest "or strate&ic

avanta&es such as access to technolo&ies' proucts or mar#ets pa! t%ice as much as a

pro"essional venture capital investor' "or a &iven o%nership position in a compan! but onl! hal"

as much as investors in a public o""erin&$

Valuation o""ere on comparable eals aroun the time o" investin& in the eal$


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Fuite obviousl!' valuation is one o" the most critical activities in the investment process$ It

%oul not be improper to sa! that the success "or a "un %ill be etermine b! its abilit! to

value7price the investments correctl!$

/ometimes the valuation process is broal! base on thumb rule metrics such as multiple o"

revenue$ Thou&h such methos %oul appear rou&h an rea!' the! are o"ten base on "airl! %ell

establishe inustr! avera&es o" operatin& pro"itabilit! an assets7capital turnover ratios

/uch valuation as outline above is possible onl! %here complete "reeom o" pricin& is

available$ In the Inian conte,t' %here until recentl!' the pricin& o" e(uit! issues %as heavil!

re&ulate' un"ortunatel! valuation %as heavil! constraine$

I" 5tructurin A Deal

/tructurin& re"ers to puttin& to&ether the "inancial aspects o" the eal an ne&otiatin& %ith the

entrepreneurs to accept a venture capital@s proposal an "inall! closin& the eal$ To o a &oo 8ob

in structurin&' one nees to be #no%le&eable in areas o" accountin&' cash "lo%' "inance' le&al

an ta,ation$ Also the structure shoul ta#e into consieration the various commercial issues 4ie

%hat the entrepreneur %ants an %hat the venture capital %oul re(uire to protect the

investment5$ Documentation re"ers to the le&al aspects o" the paper%or# in puttin& the eal

to&ether$

The instruments to be use in structurin& eals are man! an varie$ The ob8ective in selectin&

the instrument %oul be to ma,imi*e 4or optimi*e5 venture capital@s returns7protection an !et

satis"! the entrepreneur@s re(uirements$ The instruments coul be as "ollo%sH


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Instrument Issues

Loan clean vs secure

Interest bearin& vs non interest bearin&

convertible vs one %ith "eatures 4%arrants5

1st Char&e' 2n Char&e'

/toc# maturit!

Pre"erence shares reeemable 4conitions uner Compan! Act5

Participatin&

Par value

nominal shares

0arrants e,ercise price' e,pir! perio

Common shares Ne% or venor shares

Par value

partiall!)pai shares

Mptions e,ercise price' e,pir! perio' call' put

In Inia' strai&ht e(uit! an convertibles are popular an commonl! use$ No%aa!s' %arrants

are issue as a tool to brin& o%n pricin&$

A variation that %as "irst use b! PACT an TDICI %as ro!alt! on sales$ Uner this' the

compan! %as &iven a conitional loan$ I" the pro8ect %as success"ul' the compan! ha to pa! a

Q a&e o" sales as ro!alt! an i" it "aile then the amount %as %ritten o""$

In structurin& a eal' it is important to listen to %hat the entrepreneur %ants' but the venture

capital comes up %ith his o%n solution$ Even "or the propose investment amount' the venture

capital ecies %hether or not the amount re(ueste' is appropriate an consistent %ith the ris#

level o" the investment$ The ris#s shoul be anal!*e' ta#in& into consieration the sta&e at

%hich the compan! is in an other "actors relatin& to the pro8ect$ 4e& e,it problems' etc5$

Promoter /hares


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As venture capital is to "inance &ro%th' venture capital investment shoul ieall! be use "or

"inancin& e,pansion pro8ects 4e& ne% plant' capital e(uipment' aitional %or#in& capital5$ Mn

the other han' entrepreneurs ma! %ant to sell a%a! part o" their interests in orer to loc#)in a

pro"it "or their %or# in builin& up the compan!$ In such a case' the structurin& ma! inclue

some venor shares' %ith the bul# o" "inancin& &oin& into bu!in& ne% shares to "inance &ro%th$

anlin& Director@s An /hareholer@s Loans

6re(uentl!' a compan! has e,istin& irector@s an shareholer@s loans prior to invitin& venture

capitalists to invest$ As the mone! "rom venture capital is put into the compan! to "inance

&ro%th' it is pre"erable to structure the eal to re(uire these loans to be repai bac# to the

shareholers7irectors onl! upon IPMs7e,its an at some mutuall! a&ree perio 4e& 1 or 2 !ears

a"ter investment5$ This %ill increase the "inancial commitment o" the entrepreneur an the

shareholers o" the pro8ect$

A t!pical proposal ma! inclue a combination o" several i""erent instruments liste above$

Uner normal circumstances' entrepreneurs %oul pre"er venture capitals to invest in e(uit! as

this %oul be the lo%est ris# option "or the compan!$ o%ever "rom the venture capitals point o"

vie%' the sa"est instrument' but %ith the least return' %oul be a secure loan$ ence' ultimatel!'

%hat !ou en up %ith %oul be some instruments in bet%een %hich are sol to the entrepreneur$

" onitorin and Follo! U*

The role o" the venture capitalist oes not stop a"ter the investment is mae in the pro8ect$ The

s#ills o" the venture capitalist are most re(uire once the investment is mae$ The venture

capitalist &ives on&oin& avice to the promoters an monitors the pro8ect continuousl!$


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It is to be unerstoo that the proviers o" venture capital are not 8ust "inanciers or subscribers to

the e(uit! o" the pro8ect the! "un$ The! "unction as a ual capacit!' as a "inancial partner an

strate&ic avisor$

Venture capitalists monitor an evaluate pro8ects re&ularl!$ The! #eep a han on the pulse o" the

pro8ect$ The! are activel! involve in the mana&ement o" the o" the investee unit an provie

e,pert business counsel' to ensure its survival an &ro%th$ Deviations or causes o" %orr! ma!

alert them to potential problems an the! can su&&est remeial actions or measures to avoi

these problems$ As pro"essional in this uni(ue metho o" "inancin&' the! ma! have innovative

solutions to ma,imi*e the chances o" success o" the pro8ect$ A"ter all' the ultimate aim o" the

venture capitalist is the same as that o" the promoters + the lon& term pro"itabilit! an viabilit! o"

the investee compan!$

"I EBit

Mne o" the most crucial issues is the e,it "rom the investment$ A"ter all' the return to the venture

capitalist can be reali*e onl! at the time o" e,it$ E,it "rom the investment varies "rom the

investment to investment an "rom venture capital to venture capital$ There are several e,it

routes' bu!)buc# b! the promoters' sale to another venture capitalist or sale at the time o" Initial

Public M""erin&' to name a "e%$ In all cases specialists %ill %or# out the metho o" e,it an

ecie on %hat is most pro"itable an suitable to both the venture capitalist an the investee unit

an the promoters o" the pro8ect$

At present man! investments o" venture capitalists in Inia remain on paper as the! o not have

an! means o" e,it$ Appropriate chan&es have to be mae to the e,istin& s!stems in orer that

venture capitalists "in it easier to reali*e their investments a"ter holin& on to them "or a certain

perio o" time$ This "actor is even more critical to smaller an mi si*e companies' %hich are


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unable to &et liste on an! stoc# e,chan&e' as the! o not meet the minimum re(uirements "or

such listin&s$ /toc# e,chan&es coul consier ho% the! coul assist in this matter "or listin& o"

companies #eepin& in min the re(uirement o" the venture capital inustr!$


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CHAPTER 1

ACCE55IN(

"ENTURE CAPITA)

UNDERTAIN(


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The Idea

The iea an its potential "or commerciali*ation are critical$ Venture "uns loo# "or a scalable

moel' at a countr! or a re&ional level$ Mther%ise the entire &ame %oul be reuce to a

manpo%er or machine multiplication e,ercise$ 6or e,ample' it is ver! eas! "or inustan Lever

to ouble sales o" Liril ) a soap %ithout incremental cape,' %hile


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CHAPTER 11

ACCE55IN(

"ENTURE CAPITA)

FUND


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The 2usiness Plan

The "irst step to%ars accessin& venture capital "unin& is the preparation o" the business plan$

The business plan shoul be able to provie in"ormation re&arin& the promoters' amount o"

"unin& neee an the time perio "or %hich it is neee an ho% this "unin& is &oin& to be

pai bac# to the VC$ To ans%er the above "unamental (ueries o" a venture capital "irm the

business plan is to be structure %ith the necessar! in"ormation$

2usiness Plan Coverae

EBecutive su$$ar%

A brie" escription o" the compan! an the t!pe o" business

A summar! o" the business nature

A escription o" the e,perience an e,pertise o" the mana&ement team

A summar! o" the prouct7service an competition

A summar! o" "inancial histor! an pro8ections

6uns re(uire an e(uit! o""ere to the investors

A escription o" use o" procees

The timin& o" returns on investment an e,it routes o""ere to the investor

2usiness bac/round

A brie" histor! an nature o" the business

The inustr! etails o" the business involve in

A summar! o" the "uture o" the business


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Product 3 5ervice

A escription o" the prouct or service

The uni(ueness o" the prouct

The present status o" the prouct' that is a concept' protot!pe or prouct rea! "or mar#et

ar/et anal%sis

The si*e o" the potential mar#et an mar#et niche bein& pursue

A pro8ection o" the trens an "uture si*e o" the mar#et place

The estimate mar#et share

A escription o" the competition

The mar#etin& channel

A summar! o" the potential customers

The possibilit! o" relate or ne% mar#ets that can be evelope

5ales and $ar/etin strate%

The speci"ic mar#etin& techni(ues planne to be use

The pricin& plans an comparisons %ith pricin& aopte b! competitors

The planne sales "orce an sellin& strate&ies "or various accounts an mar#ets

The speci"ic approaches "or capitali*in& on each mar#etin& channel an comparison %ith

other practices %ithin the inustr!

Details o" avertisin& an promotional plans


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Return on invest$ent and eBit

Details o" the timin& an e,pecte return o" the investment

A summar! o" the e,it strate&ies' such as initial public o""erin&' sale to a thir part! or

mana&ement bu!out

Use of *roceeds

/peci"! ho% the capital %ill be spent' i$e$B %hat amount o" capital %ill &o to %hich items$

Financial su$$aries

A summar! o" the compan!@s "inancial histor! an pro8ections o" three to "ive !ear perio

Details o" the principal accountin& policies o" the compan! an the ma8or assumptions

mae about the pro8ections

A**endices

Resumes o" #e! mana&ement an emplo!ees

Detaile "inancial "orecast an assumptions

Gar#et research report

Compan! literature an brochures an pictures o" the prouct

A &oo business plan sho%s investors the (ualit! an epth o" a compan!@s corporate leaership

an inicates mana&ement@s abilit! to reach state &oals$ These "actors lie at the heart o" the

ecision o" a venture capitalist to invest in the compan!@s "uture$

5election of "enture ca*ital fund


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A"ter the business plan is complete' the ne,t step is to select the venture capital "un' %hich is

suitable to !our proposal$ The entrepreneur shoul "irst ascertain as to the investment strate&! o"

the VC %ith re&ars to the sector in %hich the VC is intereste as %ell as the sta&e at %hich he

chooses to "un the pro8ect$ 3ase on this in"ormation the entrepreneur shoul shortlist the

suitable VCs %ho match his re(uirement an then approach them

6inancin& "rom venture capital "uns is available at various sta&es an i""erent VCs provie

"unin& in some or all o" the sta&es$


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CHAPTER 1'

EGIT ROUTE5


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A"ter the unit has settle o%n to a pro"itable %or#in& an the enterprise is in a

position to raise "uns throu&h conventional resources li#e capital mar#et' "inancial

institution or commercial ban#s' the venture capitalist li(uiate their investment an

ma#e an e,it "rom the investee compan!$

The ultimate ob8ective o" a Venture Capitalist is to reali*e "rom his investment b!

sellin& o"" the same at a substantial capital &ain$ In"ect at the time o" ma#in& their

investment' the venture capitalist plan their potential e,it$

The investee compan! has to prepare an ma#e suitable a8ustments in its capital

structure at the time o" reali*ation b! the venture capitalist$ The convertible pre"erence

shares an convertible loans must be converte to orinar! e(uit! be"ore the e,it b!

the venture capitalist$ In case o" non) convertible pre"erence shares an loans b! the

venture capitalist these are to be reeeme$ At e,it the special ri&hts &rante to the

venture capitalist cease to operate an venture capital "irms normall! %ithra% their

nominees "rom the boar o" the investee compan!$

The venture capitalist "irms have a motto OeBit at the $aBi$u$ *ossible *rofit or at

a $ini$u$ *ossible loss+ in case o" a "aile investment$ The e,it can be voluntar!

or involuntar!$ Li(uiation or receivership o" a "aile venture is a case o" involuntar!

e,it$ The voluntar! e,it can have "our altenative routes "or isinvestmentH

3u! bac# o" shares b! promoters or compan!$

/ale o" stoc# 4shares5

/ellin& to a ne% investor

/trate&ic7 Trae sale


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2U9 2AC 3 5HARE5 REPURCHA5E

3u! bac# or shares repurchase has the "ollo%in& "ormsH

The investee compan! has to bu!bac# its o%n shares "or cash "rom its venture

capitalist usin& its internal accruals

The promoters an their &roup bu!s bac# the e(uit! sta#e o" venture capitalist$

The emplo!ees@ stoc# trusts are "orme %hich' in turn' bu! the share holin&

o" the venture capitalist in the compan!$

The route is suite to the Inian conitions because it #eeps the o%nership an control

o" the promoters intact$ Inian entrepreneurs are o"ten ver! touch! about o%nership

an control o" their business$ ence in Inia' "irst a bu! bac# option is normall! &iven

to the promoters or to the compan! an onl! on their re"usal the other isinvestments

routes are loo#e into$ The e,act price is mutuall! ne&otiate bet%een the

entrepreneur an the venture capitalist$ The price is etermine consierin& the boo#

value o" shares' "uture earnin& potential o" the venture' Price7Earnin& ratio o" similar

liste companies$

The companies %ere not allo%e to bu! bac# their shares in IniaB ho%ever' %ith

e""ect "rom the amenment in the companies act 41>>>5 the companies can o so no%$

5A)E OF 5HARE5 ON THE 5TOC EGCHAN(E


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The venture capitalist can e,it b! &ettin& the compan! liste on the stoc# e,chan&e

an sellin& his e(uit! in the primar! or seconar! mar#et usin& an! o" the "ollo%in&

three methosH

5ale of shares on stoc/ eBchane after listin shares,

Venture capitalists &enerall! invest at the start up sta&e an propose to isinvest their

holin& a"ter the compan! brin&s out an IPM "or raisin& "uns "or e,pansion$ This

listin& on stoc# e,chan&e provies an e,it route "rom investment$

Initial Public Offer


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normall! those %ho "in some sort o" s!ner&! bet%een the investee compan! an

their e,istin& operations such that the relationship is use"ul to both the companies$

This route is also use %hen the promoters %ant to &et ri o" the venture capitalist$

/ome venture capitalists' as a polic! concentrate their activities to startups an earl!

sta&e investments$ /uch venture capital "uns e,it pavin& %a! "or the venture capital

"un speciali*in& in the later sta&e investment or bu! out eals$ M"ten a &ro%in&

venture nees secon sta&e "inancin&' i" the e,istin& venture capitalist as a polic! oes

not commit "uns "or the secon sta&e it normall! locates another venture capitalist

that "ins the investment attractive enou&h to enter$

CORPORATE 3 TRADE 5A)E

The venture capital "irm an the entrepreneur to&ether sell the enterprise to a thir

part! mostl! a corporate entit!$ erein the promoters also e,it "rom the venture alon&

%ith the venture capitalist$This is calle a corporate' strate&ic or trae sale$ The

reasons "or this sale can be varie' i""icult! in runnin& the business pro"itabilit! or a

perceive competition "rom more establishe bi& business houses havin& hu&e

resources an business s!ner&!$

Mn the other han' %here operations o" an e,istin& venture are moest' a hi&her e,it

valuation ma! be achieve in the mar#et rather than b! a trae sale' as the mar#et

investors are usuall! s%a!e b! the appeal o" the sector in %hich the venture operates

rather than the (ualit! o" its speci"ic business operations$

odalities


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2


The moalities o" the trae sale i""er "rom case to case epenin& upon the nature o"

operations' its si*e' the re(uirements o" the bu!er' etc$ The sale can be in cash' a&ainst

the shares o" the ac(uirin& compan! or the combination o" the t%o$ The e(uit! o%ners

&et the shares o" the bu!er compan! in lieu o" the shares bein sol b! them$ /uch sales

have the avanta&e that the seller oes not have to pa! an! ta, as the transaction

involves onl! e,chan&e o" shares$

At times' it is throu&h a mana&ement bu!) out or bu!)in' %hich in turn ma! be

"inance partiall! b! another venture capital "un$ It is important to note that in Inia

i" the investee compan! is a liste compan! at the time o" trae sale' then the

provisions o" listin& a&reement are attracte besies the provisions o" the /E3I

re&ulations o" mer&er an ac(uisitions are also applicable$

anae$ent 2u%Outs

Venture capital bu!)outs are both a success"ul investment strate&! "or venture capital

investment as %ell as an e""icient e,it route$ 3u!)out "inance b! another venture

capitalist primaril! b! proviin& ebt is #no%n as leveraged buy-out. 3u!)out %ithout

participation b! another investor is calle mana&ement bu!)out$ ere in the current

mana&ement &roup purchases the sta#e o" the venture capitalist$ The stoc# options an

s%eat e(uit! have mae mana&ement bu!)out possible in Inia$

Gana&ement bu!)outs are important in venture capital mar#et "or various reasonsH

G3M@s provie an opportunit! to mana&ers to become entrepreneurs$

Venture capital investment in bu!)out has a lo%er investment ris# than earl!

sta&e investment$

G3M@s help smaller enterprises to aapt to technolo&ical chan&es$


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2u%inis similar to bu!)out but involves ne% mana&ement "rom outsie an

improvement in the operations o" the venture$ Incomin& ne% mana&ement is o"ten

un"amiliar %ith the operations o" the venture hence the ac(uirin& compan! ma! "eel

that the continuit! o" the e,istin& entrepreneur %ill be bene"icial "or the businessB the

services o" the ori&inal entrepreneur are retaine$ This helps in implementin& the

remainin& parts o" the ori&inal ieas an also provies continuit! to the venture$

PREREJUI5ITE FOR THE EFFICIENT EGIT ECHANI5

Le&al "rame%or#

/mooth proceures "or sale 7 trans"er o" enterprises

E""icient stoc# mar#et

Gechanism "or listin& an train& o" e(uit! o" smaller companies$


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CHAPTER 10

RE(U)ATOR9

FRAE-OR FOR

"ENTURE CAPITA)


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IN INDIA

In his bu&et speech "or 1>)>' the "inance minister eclare that a scheme %ill be "ormulate

uner %hich Ventures Capital Companies 7 6uns %ill be enable to invest in ne% companies

an be eli&ible "or the concessional treatment o" capital &ains available to non)corporate entities$

/uch companies %ill have to compl! %ith the "ollo%in& &uielines$

The minimum si*e o" a venture capital compan! %oul be Rs$1 crore$ I" it esires to raise "un

"rom the public the promoter@s share shall be less than 1 per cent$

Venture capital assistance shoul &o mainl! to enterprises %here the ris# element is

comparativel! hi&h ue to the technolo&! involve bein& relativel! ne%' untrie or ver! closel!

hel' an7or the entrepreneur bein& relativel! ne% an not a""luent thou&h other%ise (uali"ie

an the si*e bein& moest$ The assistances shoul be mainl! "or e(uit! support thou&h loan

support to supplement this ma! also be &iven$

Thus' venture capital assistance %ill be &iven to those entrepreneurs %hich satis"! the "ollo%in&

parameters H

Total investment not to e,cee Rs$1 crores$

Ne% or relativel! untrie or ver! closel! hel or bein& ta#en "rom pilot to commercial state or

%hich incorporate some si&ni"icant improvement over the e,istin& ones in Inia$

Relativel! ne%' pro"essionall! or technicall! (uali"ie %ith inae(uate resources or ban#in& to


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"inance the pro8ect$

A venture capital is re(uire to invest at least ; per cent o" its "uns in venture capital activit!$

A venture capital is "irm can raise "uns throu&h pubic issues an7or private placement to "inance

VC67VCCs$ 6orei&n e(uit! upto 2 per cent multilateral 7 international "inancial or&ani*ations'

evelopment "inance institutes' repute mutual "uns' etc$' %oul be permitte provie these are

mana&ement neutral an are "or meium to lon&)term investments$

A venture capital "un %ill be mana&e b! pro"essional such as ban#ers' mana&ers an

aministration an persons %ith ae(uate e,perience o" inustr!' "inance' accounts etc$

The chan&e "inancial an "iscal environment urin& post liberali*ation perio hol out bri&ht

"uture o" venture capital in Inia$ 0ith "allin& ta, rates e(uit! becomes attractive' an promoters

%ant to put in ma,imum "uns$ In ne% companies toa!$ The ebt)e(uit! ratio is &enerall! 2H1$

The promoter has to compulsoril! contribute 2 percent o" the pro8ects cost' not 8ust the e(uit!$

o%ever because inustr! is more competitive toa! promoters are %illin& to contribute as

much as ? per cent o" the pro8ect cost$ 3an#s an other "inance institutions bein& ris# averse

%ill "un a ne% venture$

Uner the circumstances these entrepreneurs %ill be le"t %ith no option but to resort to venture

capital "irm' to "ill the &ap in their contribution to pro8ect cost$ This is ver! li#el! to continue as

pro"essional start their contribution to pro8ect cost$ This is ver! li#el! to continue as pro"essional

start their o%n units' ancillarisation ta#es place an lar&e companies be&an sourcin& their

re(uirement rather than ma#in& ever! thin& themselves$


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CHAPTER 14

5-OT ANA)95I5

OF INDIAN

"ENTURE CAPITA)

INDU5TR9


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5TREN(HT5 -EANE55

An effort initiated fro$ !ithin K Ho$e ro!n

Increased a!areness of venture ca*ital

ore ca*ital under $anae$ent b% "CFs

Industr% crossed learnin curve,

ore eB*erienced "enture Ca*italists#

Inter$ediaries# and Entre*reneurs,

(ro!in nu$ber of forein trained *rofessionals,

(lobal co$*etition ro!in,

ovin to!ards international standards

Offshore funds brin stron forein ties

atured to!ards $ar/et s%ste$

Electronic tradin K throuh N5E . 25E,

"aluation addition

Irreversible refor$

Reulator% fra$e!or/ evolvin

Faddish

)i$ited eBit o*tion

Uncertainties

Polic% re*atriation# taBation

2ureaucratic $eddlin and ri

official

attitude

Industr% fra$ented and *olari7e

iBed ",C culture

5$aller funds !ith illi>u

invest$ents

Do$estic fund raisin difficult

)ac/ of trans*arenc% . cor*orate

overnance

Accountin standards

Poor leal ad$inistration

Difficult due dilience

Inade>uate $anae$ent de*th

"aluation eB*ectations unrealistic

Technical and ar/et evaluati


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>


difficult

Neliible $inorit% *rotecti

rihts

Inade>uate cor*orate la!s

OPPORTUNITIE5 THREAT5

(ro!th ca*ital for stron co$*anies

and 2u%outs of !ea/ co$*anies due to ro!in lobal

co$*etition

Financial restructurin have over leveraed

co$*anies ta/in *lace,

Ac>uisition of >uoted s$all3 $ediu$ ca*

co$*anies,

Pre $one% valuations lo!

"ast *otential eBists in turn around# 2O#

2I,

Chane in overn$ent *olicies !ith res*ect

to K

1, 5tructurin

', TaBation

Threats fro$ !ithin EB*losive eB*ansion

and over EBuberance of investors

(reed fro ver% hih returns,


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;


CHAPTER 16

I55UED FACED 29

"ENTURE CAPITA)

IN INDIA


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The Inian venture capital inustr!' at the present' is at crossroas$ 6ollo%in& are the ma8or

issues "ace b! this inustr!$

1$ )i$itation on structurin of "enture Ca*ital Funds


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;2


Income Ta, Act income o" omestic VC6s' %hich provie assistance to small' an meium

enterprise is not totall! e,empte "rom ta,$ In absence o" an! inventive' it is e,tremel! i""icult

"or omestic VC6s to raise mone! "rom this investor &roup that has a &oo potential$

?$ Absence of Lanel investors& In /ilicon Valle!' %hich is a nurturin& &roun "or venture

"uns "inance IT companiesB initial7 see sta&e "inancin& is provie b! the an&el investors till

the compan! becomes eli&ible "or venture "unin& $ There a"ter Venture Capitalist throu&h

"inancial support an value)ae inputs enables the compan! to achieve better &ro%th rate an

"acilitate its listn& on stoc# e,chan&es$ Private e(uit! investors t!picall! invest at e,pansion7

later sta&es o" &ro%th o" the compan! %ith lar&e investments$ In contrast to this phenomenon'

Inian inustr! is mar#e b! an absence o" an&el investors$

$ )i$itations of invest$ent instru$ents& As per the section 142-6A5 o" the Income Ta,

Act' income "rom investments onl! in e(uit! instruments o" venture capital unerta#in&s is

eli&ible "or ta, e,emptionB %hereas /E3I re&ulations allo% investments in the "orm o" e(uit!

shares or e(uit! relate securities issue b! compan! %hose shares are not liste on stoc#

e,chan&e$ As VC6s normall! structure the investments in venture capital unerta#in&s b! %a! o"

e(uit! an convertible instruments such as Mptionall!7 6ull! Convertible Debentures'

Reeemable Pre"erence shares etc$' the! nee ta, brea#s on the income "rom e(uit! lin#e

instruments$

$ Do$estic "CFs visMvis Offshore Funds& The omestic VC6s operations in the

countr! are &overne b! the re&ulations as prescribe b! /E3I an investment restrictions as

place b! C3DT "or availin& o" the ta, bene"its$ The! pa! ma,imum mar&inal ta, - percent in

respect o" non)e,empt income such as interest throu&h Debentures etc$' %hile o"") shore "uns

%hich are structure in ta, havens such as Gauritius are able to overcome the investment

restriction o" /E3I an also &et e,emption "rom Income Ta, uner Ta, Avoiance Treaties$ This


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enies a level pla!in& "iel "or the omestic investors "or carr!in& out the similar activit! in the

countr!$

;$ )i$itation on industr% se$ents& In sharp contrast to other countries %here telecom'

services an so"t%are ba& the lar&est share o" venture capital investments' in Inia other

conventional sectors ominate venture "inance$ Mpenin& up o" restrictions' in recent time' on

investin& in the services sectors such as telecommunication an relate services' pro8ect

consultanc!' esi&n an testin& services' tourism etc' %oul increase the omain an &ro%th

possibilities o" venture capital$

$ Ano$al% bet!een 5E2I reulations and C2DT rules& C3DT ta, rules reco&ni*e

investment in "inanciall! %ea# companies onl! in case o" unliste companies as venture

investment %hereas /E3I re&ulations reco&ni*e investment in "inanciall! %ea# companies'

%hich o""ers an attractive opportunit! to VC6s$ The same ma! be allo%e b! C3DT "or availin&

o" ta, e,emption on capital &ains at a later sta&e$ Also /E3I re&ulations o not restrict si*e o" an

investment in a compan!$ o%ever' as per Income ta, rules' ma,imum investment in a compan!

is restricte to less than 2 per cent o" the raise corpus o" VC6 an pai up share capital in case

o" Venture Capital Compan!$ 6urther' investment in compan! is also restricte upto ? per cent

o" e(uit! o" Investee Compan!$ VC6s ma! place the investment restriction "or VC6s b! %a! o"

ma,imum e(uit! sta#e in the compan!' %hich coul be upto ?> per cent o" e(uit! o" the Investee

Compan!$

>$ )i$itations on EBit echanis$& The VC6s ' %hich have investe in various ventures'

have not been able to e,it "rom their investments ue to limite e,it routes an also ue to

unsatis"actor! per"ormance o" MTCEI $ The threshol limit place b! various stoc# e,chan&es

acts as eterrent "or listin& o" companies %ith smaller e(uit! base$ /E3I can consier lo%erin&

o" threshol limit "or public7listin& "or companies bac#e b! VC6s$ 3u!)bac# o" e(uit! shares b!


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the compan! has been permitte "or unliste companies' %hich %oul provie e,it route to

investment o" venture capitalists$

1$ )eal Fra$e!or/&Lac# o" re(uisite le&al "rame%or# resultin& in ae(uate penalties in

case o" suppression o" "acts b! the promoters)results in lo% returns even "rom per"ormin&

companies$ This has bearin& on e(uit! investments particularl! in unliste companies$

CHAPTER 18

FUTURE OF

"ENTURE CAPITA)

IN INDIA


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Rapil! chan&in& economic environment accelerate b! the hi&h technolo&! e,plosion'

emer&in& nees o" ne% &eneration o" entrepreneurs in the process an inae(uac! o" the e,istin&

venture capital "uns7schemes are inicative o" the tremenous scope "or venture capital in Inia

an pointers to the nee "or the creation o" a soun an broa)base venture capital movement

Inia$

There are man! entrepreneurs in Inia %ith a &oo pro8ect iea but no previous entrepreneurial

trac# recor to levera&e their "irms' hanle customers an ban#ers$ Venture capital can open a

ne% %ino% "or such entrepreneurs an help them to launch their pro8ects success"ull!$

0ith rapi international march o" technolo&!' eman "or ne%er technolo&! an proucts in

Inia has &one up tremenousl!$ the pace o" evelopment o" ne% an ini&enous technolo&! in

the countr! has been slac# in vie% o" the "act that several process evelope in laboratories are

not commerciali*e because o" un%illin&ness o" people to ta#e entrepreneurial ris#s' i$e$ ris#

their "uns as also uner&o the oreal o" mar#etin& the proucts an process$ In such a situation'

venture "inancin& assumes more si&ni"icance$ It can act not onl! act as a "inancial catal!st but

also provie stron& impetus "or entrepreneurs to evelop proucts involvin& ne%er technolo&ies

an commerciali*e them$ This %ill &ive a "illip to the evelopment o" ne% technolo&! an %oul

&o a lon& %a! in broaenin& the inustrial base' creation o" 8obs' provie a thrust to e,ports an

help in the overall enrichment o" the econom!$


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In aition' venture capital %ill be neee ur&entl! to solve the serious problems o" sic#ness

%hich has pla&ue man! Inian Inustries$ There are lar&e number o" sic# companies %hich

o""er opportunities "or turn)aroun' either throu&h a chan&e in the prouct line or use o" e,istin&

"acilities in a i""erent %a! or in an! other manner$ 0hat is neee is the suppl! o" e(uit! to

persons %ho have "ertile ieas' necessar! e,pertise an competence an %ho can brin& about

improvements in some units$

Another t!pe o" situation commonl! "oun in our countr! is %here the local &roup an a multi)

national compan! ma! be rea! to enter into a 8oint venture but the "ormer oes not have

su""icient "uns to put up its share o" the e(uit! an the latter is restricte to a certain percenta&e$

6or the personal reasons or because o" competition' the local &roup ma! not be #een to invite an!

one in its inustr! or an! ma8or private investor to contribute e(uit! an ma! pre"er a venture

capital compan!' as a less intimatel! involve an temporar! shareholer$ Venture capitalists can

also len their e,pertise an stanin& to the entrepreneurs$

A lar&e number o" smaller units servin& as ancillaries to ma8or inustrial &roups nee capital'

e,pertise an contacts o" venture capitalist "or up&raation o" their technolo&! in tune %ith the

emans "rom the ma8or inustrial units$ It is &enerall! "oun that small suppliers are "ace %ith

a choice o" &oin& out o" business' losin& their ma8or client' bein& ac(uire b! the client or

obtainin& at an e,orbitant rate "rom a source outsie the inustr!$ Venture capitalist can help

these units an save them "rom the crisis$

In service sector' %hich has Immense &ro%th prospects in Inia' venture capitalists can pla!

si&ni"icant role in tappin& its potentialit! to the "ull$ 6or instance' venture capitalists can provie

capital an e,pertise to or&ani*ations sellin& anti(ue' remoele 8e%eller!' builers o" resort


77/83


78/83

;


CHAPTER 1?

CONC)U5ION


79/83


80/83


%ill also provie protection to investors' especiall! small investors$ 6urther it %ill

result in substantial an sustainable emplo!ment &eneration b! creatin& relate

ancillar! units an support services$

6inall!' research laboratories uner C/IR' e"ense laboratories' universities an

technical institutes are carr!in& out a lot o" scienti"ic an technical research$ A

suitable venture capital environment can help in ienti"!in& an convertin& some o"

this research into commercial prouction in the /mall an Geium /cale sectors$

Thus' it is apparent that venture capital "unin& shoul be encoura&e to "acilitate

evelopment in small an meium enterprise %hich in turn leas to overall &ro%th in

the Inian econom!$


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1


CHAPTER 1@

2I2)O(RAPH9


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2


Reference 2oo/s . aa7ines

"enture Ca*ital# The Indian EB*erience b% I T Tande%

Issues Facin Indian "enture Ca*ital Industr% b% H Raur/ar

2usiness -orld

India Toda%

Ne!s*a*ers

The Ti$es of India

Econo$ics Ti$es

Indian EB*ress

Financial EB*ress


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-ebsites

!!!,indiainfoline,co$

!!!,icfai*ress,or

!!!,!ebcra!ler,co$

!!!,na$asthenri,co$
http://www.indiainfoline.com/http://www.icfaipress.org/http://www.webcrawler.com/http://www.namasthenri.com/http://www.indiainfoline.com/http://www.icfaipress.org/http://www.webcrawler.com/http://www.namasthenri.com/

Documents

Blackbook Project on Venture Capital