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A Specialization project Report submitted in partial fulfillment of requirement of two years Full time Master of Management studies (2011-2013) Degree Program of University of Mumbai



Under The Guidance of (Prof.AKSHAY PIMPLE)

Rohidas Patil Institute of Management Studies

Mahavidya Marg, Navghar Bhayandar (East) Dist-Thane, Pin Code: 401105 (Affiliated to University of Mumbai)


The Specialization Project in Partial Fulfillment of requirements of Master of management Studies (MMS) Program (2011-2013 Batch) of University of Mumbai in Marketing Specialization entitled Retail marketing in india has been carried out entirely be me under the supervision of my guide Mr.Akshay Pimple, during academic year 2012-2013 in second year of MMS. I declare that Specialization project work is original and has not been submitted in part or full to any other university/institution/statutory body for the award of any Degree/Diploma.

Candidate Name:Shivkumar .R. Shukla


Bhayandar (East)



It gives me immense pleasure to thank every person who helped me in completion of my project Retail Marketing in India.

I would like to thank my guide Prof .Akshay Pimple for her vital encouragement and support. He not only directed to me a wide range of resources but also answered all my queries that helped me to narrow my research.

I also thank our director Dr.C.V Joshi for the help and inspiration he extended. I would also like to express my sincere thanks to all the respondents, my friends and others involved who provided me with time , sup[port and inspiration needed to prepare this project

PREFACE In India, a revolution is ushering in a new economy, wherein major investment are being made in the knowledge based industry withsubstantially low investments in land, building, plant and machinery .The asset/collateral-backed lending instruments adopted for the hard for the hardcore manufacturing industries, are proving to be inadequate for the knowledge based industries that very often start with just an idea.The only way to finance such industries is through Venture 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 world wide. 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

This report, which contains in-depth study of Venture Capital Industry in India, is made with an intension to get through all the aspects related 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 that 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. A similar 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 users world wide inY2K project is demonstrated asset. Second: A good number of successful Indian entrepreneurs in Silicon Valleyshould have a demonstration effect for venture capitalists to invest in Indiantalent 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 deals with a specific aspect of business especially small business and the provision of risk- capital so essential to their birth, survival and profitable growth. It is not concerned with the banking instruments for short term finances e.g. overdrafts and loans. 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


The Main Objective of the project report is to know about Venture Capital Financing in India and sub-objectives are as follows :

To know whether venture capital funds supply any capital/services to existing companies.

To understand that venture capital fund provide seed capital and development capital.

To understand that venture capital funds provide capital to new business in foreign operations

To understand the venture capital role in supply management and marketing expertise.

To understand venture capital financing, its uses and scope of activities. To understand the common profit targets.


The term venture capital comprises of two words that is, Venture and Capital. Venture is a course of processing, the outcome of which is uncertain but to which is attended the risk or danger of loss. Capital means recourses to start an enterprise. To connote the risk and adventure of such a fund, the generic name Venture Capital was coined. Venture capital is considered as financing of high and new technology based enterprises. It is said that Venture capital involves investment in new or relatively untried technology, initiated by relatively new and professionally or technically qualified entrepreneurs within adequate funds. The conventional financiers, unlike Venture capitals, mainly finance proven technologies and established markets. However, high technology need not be pre-requisite for venture capital. Venture capital has also been described as unsecured risk financing. The relatively high risk of venture capital is compensated by the possibility of high returns usually through substantial capital gains in the medium term. Venture capital in broader sense is not solely an injection of funds into a new firm, it is also an input of skills needed to set up the firm, design its marketing strategy, organize and manage it. Thus it is a long term association with successive stages of companys development under highly risk investment conditions, with distinctive type of financing appropriate to each stage of development. Investors join the entrepreneurs as co-partners and support the project with finance and business skills to exploit the market opportunities. Venture capital is not a passive finance. It may be at any stage of business/production cycle, that is, start up, expansion or to improve a product or process, which are associated with both risk and reward. The Venture capital makes higher capital gains through appreciation in the value of such investments when the new technology succeeds. Thus the primary return sought by the investor is essentially capital gain rather than steady interest income or dividend yield. The most flexible Definition of Venture capital The support by investors of entrepreneurial talent with finance and business skills to exploit market opportunities and thus obtain capital gains.Venture capital commonly describes not only the provision of start up finance or seed corn capital but also development capital for later stages of business. A long term commitment of funds is

involved in the form of equity investments, with the aim of eventual capital gains rather than income and active involvement in the management of customers business.

Need of venture capital

There are entrepreneurs and many other people who come up with bright ideas but lack the capital for the investment. What these venture capitals do are to facilitate and enable the start up phase.

When there is an owner relation between the venture capital providers and receivers, their mutual interest for returns will increase the firms motivation to increase profits.

Venture capitalists have invested in similar firms and projects before and, therefore, have more knowledge and experience. This knowledge and experience are the outcomes of the experiments through the successes and failures from previous ventures, so they know what works and what does not, and how it works. Therefore, through venture capital involvement, a portfolio firm can initiate growth, identify problems, and find recipes to overcome them.


Venture capital Scenario in India: In the earlier years, individual investors and development financial institutions played the role of venture capitalists in India and entrepreneurs largely depended upon private placements, public offerings and the finance lend by financial institutions. In early seventies, the need to foster venture capital as a source of funding new entrepreneurs and technology was highlighted by the Committee on Development of Small and Medium Enterprises. In spite of some public sector funds being set up, the venture capital activity did not gather momentum. In 1988, the Government of India, based on a study undertaken by the World Bank, announced guidelines for setting up venture capital funds (VCFs). These guidelines were restricted to setting up of VCFs by banks or financial institutions only. Internationally, however, entrepreneurs who are willing to take higher risk, in anticipation of higher returns, usually set up venture capital funds. This is in contrast to banks and financial institutions, which are more averse to risk. In September 1995, Government of India issued guidelines for overseas venture capital investment in India whereas the Central Board of Direct Taxes (CBDT) issued guidelines for tax exemption purposes. As a part of its mandate to regulate and to develop the Indian capital markets, Securities and Exchange Board of India (SEBI) framed the SEBI (Venture Capital Funds) Regulations, 1996. Pursuant to the regulatory framework, some domestic VCFs were registered with SEBI. Some overseas investments also came through the Mauritius route. However, the venture capital industry, understood globally as independently managed, dedicated pools of capital that focus on equity or equity linked investments in privately held, high growth companies is still relatively in a nascent stage in India. Figures from the Indian Venture Capital Association (IVCA) reveal that, till 2000, around Rs. 2,200 crore (US$ 500 million) had been committed by the domestic VCFs and offshore funds which are members of IVCA. Figures available from private sources indicate that overall funds committed are around US$ 1.3 billion.

Also due to economic liberalisation and increasing global outlook in India, an increased awareness and interest of domestic as well as foreign investors in venture capital was observed. While only 8 domestic VCFs were registered with SEBI during 1996-98, more than 30 additional funds have already been registered in 2000-01. Institutional interest is growing and foreign venture investments are also on the increase. Given the proper environment and policy support, there is a tremendous potential for venture capital activity in India. The Finance Minister, in the Budget 2000 speech announced, "For boosting high tech sectors and supporting first generation entrepreneurs, there is an acute need for higher investments in venture capital activities." He also said that the guidelines for the registration of venture capital activity with the Central Board of Direct Taxes would be harmonised with those for registration with the Securities and Exchange Board of India. SEBI decided to set up a committee on venture capital to identify the impediments and suggest suitable measures to facilitate the growth of venture capital activity in India. Keeping in view the need for global perspective, it was decided to associate Indian entrepreneur from Silicon Valley in the committee. The setting up of this committee was primarily motivated by the need to play a facilitating role in tune with the mandate of SEBI, to regulate as well as develop the market. The committee headed by K. B. Chandrasekhar, Chairman, Exodus Communications Inc., submitted its report on 8 January 2000. In his Budget Proposals 2000-01, the Finance Minister announced new regime for venture capital funds. And proclaimed SEBI as the single point nodal agency for registration and regulation of both domestic and overseas venture capital funds. The new regime stipulated that no approval of venture capital funds by tax authorities would be required and that the principle of "pass through" would be applied in tax treatment of venture capital funds. Recently, the Government of India has also announced the"exit policy" for venture capitalists. India has the second largest English speaking scientific and technical manpower in the world. Given this quality and magnitude of human capital India's potential to create enterprises is unlimited. Given the vast potential, which is, not only confined to IT and software but also in other sectors like biotechnology, telecommunications, media and entertainment, medical and health etc., venture capital industry is playing and shall continue to play a catalyst's role in industrial development.

In the early 1980s, the idea that venture capital might be established in India would have seemed utopian. India's highly bureaucratized economy, avowed pursuit of socialism, still quite conservative social and business worlds, and a risk-averse financial system provided little institutional space for the development of venture capital. With the high level of government involvement, it is not surprising that the first formal venture capital organizations began in the public sector. From its inception the Indian venture capital was linked with exogenous actors, public and private. In India, one of the most autarchic economies in the world, both the development of venture capital and the information technology industry have been intimately linked with the international economy. The earliest discussion of venture capital in India came in 1973, when the government appointed a commission to examine strategies for fostering small and medium-sized enterprises the Indian financial systems' operation made it difficult to raise "risk capital" for new ventures and proposed various measures to liberalize and deregulate the financial market. The First Stage, 19861995 Indian policy toward venture capital has to be seen in the larger picture of the government's interest in encouraging economic growth. The 1980s were marked by an increasing disillusionment with the trajectory of the economic system and a belief that liberalization was needed. Prior to 1988, the Indian government had no policy toward venture capital; in fact, there was no formal venture capital. In 1988, the Indian government issued its first guidelines to legalize venture capital operations. These regulations really were aimed at allowing state controlled banks to establish venture capital subsidiaries, though it was also possible for other investors to create a venture capital firm. However, there was only minimal interest in the private sector in establishing a venture capital firm. The government's awakening to the potential of venture capital occurred in conjunction with the World Bank's interest in encouraging economic liberalization in India. So, in November 1988, the Indian government announced an institutional structure for venture capital. Making the case for supporting the new venture capital guidelines

with investments into Indian venture capital funds, the World Bank calculated that demand over the next 23 years would be around $67133 million per annum, and it proposed providing $45 million to four public sector financial institutions for the purpose of permitting them to establish venture capital operations under the November 1988 guidelines issued by the Government of India. The funds were restricted to investing in small amounts per firm (less than 100 million rupees); the recipient firms had to be involved in technology that was new, relatively untried, very closely held or being taken from pilot to commercial stage, or which incorporated some significant improvement over the existing ones in India. The government also specified that the recipient firms founders should be relatively new, professionally or technically qualified, and with inadequate resources or backing to finance the project. There were also other bureaucratic fetters. There was even a list of approved investment areas. Two government-sponsored development banks, ICICI and IDBI, were required to clear every portfolio firms application to a venture capital firm to ensure that it fulfilled the right purposes. Also, the Controller of Capital Issues of the Ministry of Finance had to approve every line of business in which a venture capital firm wished to invest. In other words, the venture capitalists were to be kept on a very short leash. The Second Stage, 19951999 The success of Indian entrepreneurs in Silicon Valley that began in the 1980s became far more visible in the 1990s. This attracted attention and encouraged the notion in the U.S. that India might have more possible entrepreneurs. Very often, NRIs were important investors in these funds. In quantitative terms, it is possible to see a dramatic change in the role of foreign investors. Notice also the comparative decrease in the role of the multilateral development agencies and the Indian governments financial institutions. The overseas private sector investors became a dominant force in the Indian venture capital industry



Established The company











There are following groups of players: Angels and angel clubs Venture Capital funds -Small -Medium -Large Corporate venture funds Financial service venture groups

Angels and angel clubs Angels are wealthy individuals who invest directly into companies. They can formangel clubs to coordinate and bundle their activities. Besides the money, angelsoften provide their personal knowledge, experience and contacts to support their investees. With average deals sizes from USD 100,000 to USD 500,000 theyfinance companies in their early stages. Examples for angel clubs are MediaClub, Dinner Club , Angel's Forum

Small and Upstart Venture Capital Funds These are smaller Venture Capital Companies that mostly provide seed and startup capital. The so called "Boutique firms" are often specialized in certain industries or market segments. Their capitalization is about USD 20 to USD 50million (is this deals size or total money under management or money under management per fund?) . As for the small and medium Venture Capital funds strong competition will clear the marketplace. There will be mergers and acquisitions leading to a concentration of capital. Funds specialized in different business areas will form strategic partnerships. Only the more successful funds will be able to attract new money. Examples are: Artemis Comaford Abbell Venture Fund Acacia Venture Partners

Medium Venture Funds The medium venture funds finance all stages after seed stage and operate in all business segments. They provide money for deals up to USD 250 million. Single funds have up to USD 5 billion under management. An example is Accel Partners

Large Venture Funds As the medium funds, large funds operate in all business sectors and provide all types of capital for companies after seed stage. They often operate internationally and finance deals up to USD 500 million The large funds will try to improve their position by mergers and acquisitions with other funds to improve size, reputation and their financial muscle. In addition they will to diversify. Possible areas to enter are other financial services by means of M&As with financial services corporations and the consulting business. For the latter one the funds have a rich resource of expertise and contacts in house. In a declining market for their core activity and with lots of tumbling companies out there is no reason why Venture Capital funds should offer advice and consulting only to their investees


ResponsAbility India Accel Partners India Artheon Ventures Artiman Ventures August Capital Partners BlueRun Ventures DFJ India Epiphany Ventures Helion Venture Partners IFCI Venture Capital Funds India Innovation Investors Inventus (India) Advisory Company JAFCO Asia Netz Capital Nexus India Capital Ojas Venture Partners Reliance Venture SAIF Partners Sequoia Capital Trident Capital Veddis Ventures VentureEas

THE VENTURE SPECTRUM The growth of an enterprise follows

Venture capital was started as early stage financing of relatively small but rapidly growing companies. However various reasons forced venture capitalists to be more and more involved in expansion financing to support the development of existing portfolio companies. With increasing demand of capital from newer business, Venture capitalists began to operate across a broader spectrum of investment interest. This diversity of opportunities enabled Venture capitalists to balance their activities in term of time involvement, risk acceptance and reward potential, while providing on going assistance to developing business. Different venture capital firms have different attributes and aptitudes for different types of Venture capital investments. Hence there are different stages of entry for different Venture capitalists and they can identify and differentiate between types of Venture capital investments, each appropriate for the given stage of the investee company, These are:1. Early Stage Finance Seed Capital Start up Capital Early/First Stage Capital Later/Third Stage Capital

2. Later Stage Finance Expansion/Development Stage Capital Replacement Finance Management Buy Out and Buy ins Turnarounds

Mezzanine/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 round finance does not always follow early stage finance. If the business grows successfully it is likely to develop sufficient cash to fund its own growth, so does not require venture capital for growth. The table below shows risk perception and time orientation for different stages of venture capital financing

Financial stage

Period(funds locked in years) Early stage 7-10 financed stage Start up 5-9 First stage 3-7 Second stage 3-5

Risk perception Extreme Very high High Sufficently

Activity to financed



Deal origination: In generating a deal flow, the VC investor creates a pipeline of deals or investment opportunities that he would consider for investing in. Deal may originate in various ways. referral system, active search system, and intermediaries. Referral system is an important source of deals. Deals may be referred to VCFs by their parent organizations, trade partners, industry associations, friends etc. Another deal flow is active search through networks, trade fairs, conferences, seminars, foreign visits etc. Intermediaries is used by venture capitalists in developed countries like USA, is certain intermediaries who match VCFs and the potential entrepreneurs.

Screening: VCFs, before going for an in-depth analysis, carry out initial screening of all projects on the basis of some broad criteria. For example, the screening process may limit projects to areas in which the venture capitalist is familiar in terms of technology, or product, or market scope. The size of investment, geographical location and stage of financing could also be used as the broad screening criteria.

Due Diligence: Due diligence is the industry jargon for all the activities that are associated with evaluating an investment proposal. The venture capitalists evaluate the quality of entrepreneur before appraising the characteristics of the product, market or technology. Most venture capitalists ask for a business plan to make an assessment of the possible risk and return on the venture. Business plan contains detailed information about the proposed venture. The evaluation of ventures by VCFs in India includes; Preliminary evaluation: The applicant required to provide a brief profile of the proposed venture to establish prima facie eligibility. Detailed evaluation: Once the preliminary evaluation is over, the proposal is evaluated in greater detail. VCFs in India expect the entrepreneur to have:- Integrity, long-term vision, urge to grow, managerial skills, commercial orientation. VCFs in India also make the risk analysis of the proposed projects which includes: Product risk, Market risk, Technological risk and Entrepreneurial risk. The final decision is taken in terms of the expected risk-return trade-off as shown in Figure.

Deal Structuring: In this process, the venture capitalist and the venture company negotiate the terms of the deals, that is, the amount, form and price of the investment. This process is termed as deal structuring. The agreement also include the venture capitalist's right to control the venture company and to change its management if needed, buyback arrangements, acquisition, making initial public offerings (IPOs), etc. Earned out arrangements specify the entrepreneur's equity share and the objectives to be achieved.

Post Investment Activities: Once the deal has been structured and agreement finalized, the venture capitalist generally assumes the role of a partner and collaborator. He also gets involved in shaping of the direction of the venture. The degree of the venture capitalist's involvement depends on his policy. It may not, however, be desirable for a venture capitalist to get involved in the day-to-day operation of the venture. If a financial or managerial crisis occurs, the venture capitalist may intervene, and even install a new management team.

Exit: Venture capitalists generally want to cash-out their gains in five to ten years after the initial investment. They play a positive role in directing the company towards particular exit routes. A venture may exit in one of the following ways: There are four ways for a venture capitalist to exit its investment: Initial Public Offer (IPO) Acquisition by another company Re-purchase of venture capitalists share by the investee company Purchase of venture capitalists share by a third party

Promoters Buy-back The most popular disinvestments route in India is promoters buy-back. This route is suited to Indian conditions because it keeps the ownership and control of the promoter intact. The obvious limitation, however, is that in a majority of cases the market value of the shares of the venture firm would have appreciated so much after some years that the promoter would not be in a financial position to buy them back. In India, the promoters are invariably given the first option to buy back equity of their enterprises. For example, RCTC participates in the assisted firms equity with suitable agreement for the promoter to repurchase it. Similarly, Canfina-VCF offers an opportunity to the promoters to buy back the shares of the assisted firm within an agreed period at a predetermined price. If the promoter fails to buy back the shares within the stipulated period, CanfinaVCF would have the discretion to divest them in any manner it deemed appropriate. SBI capital Markets ensures through examining the personal assets of the promoters and their associates, which buy back, would be a feasible option. GVFL would make disinvestments, in consultation with the promoter, usually after the project has settled down, to a profitable level and the entrepreneur is in a position to avail of finance under conventional schemes of assistance from banks or other financial institutions.

Initial Public Offers (IPOs) The benefits of disinvestments via the public issue route are, improved marketability and liquidity, better prospects for capital gains and widely known status of the venture as well as market control through public share participation. This option has certain limitations in the Indian context. The promotion of the public issue would be difficult and expensive since the first generation entrepreneurs are not known in the capital markets. Further, difficulties will be caused if the entrepreneurs business is perceived to be an unattractive investment proposition by investors. Also, the emphasis by the Indian investors on short-term profits and dividends may tend to make the market price unattractive. Yet another difficulty in India until recently was that the Controller of Capital Issues (CCI) guidelines for determining the premium on shares took into account the book value and the cumulative average EPS till the date of the new issue. This formula failed to give due weight age to the expected stream of earning of the venture

firm. Thus, the formula would underestimate the premium. The Government has now abolished the Capital Issues Control Act, 1947 and consequently, the office of the controller of Capital Issues. The existing companies are now free to fix the premium on their shares. The initial public issue for disinvestments of VCFs holding can involve high transaction costs because of the inefficiency of the secondary market in a country like India. Also, this option has become far less feasible for small ventures on account of the higher listing requirement of the stock exchanges. In February 1989, the Government of India raised the minimum capital for listing on the stock exchanges from Rs 10 million to Rs 30 million and the minimum public offer from Rs 6 million to Rs 18 million. Sale on the OTC Market An active secondary capital market provides the necessary impetus to the success of the venture capital. VCFs should be able to sell their holdings, and investors should be able to trade shares conveniently and freely. In the USA, there exist well-developed OTC markets where dealers trade in shares on telephone/terminal and not on an exchange floor. This mechanism enables new, small companies which are not otherwise eligible to be listed on the stock exchange, to enlist on the OTC markets and provides liquidity to investors. The National Association of Securities Dealers Automated Quotation System(NASDAQ) in the USA daily quotes over 8000 stock prices of companies backed by venture capital. The OTC Exchange in India was established in June 1992. The Government of India had approved the creation for the Exchange under the Securities Contracts (Regulations) Actin 1989. It has been promoted jointly by UTI, ICICI, SBI Capital Markets, Can bank Financial Services, GIC, LIC and IDBI. Since this list of market-makers (who will decide daily prices and appoint dealers for trading) includes most of the public sector venture financiers, it should pick up fast, and it should be possible for investors to trade in the securities of new small and medium size enterprises. The other disinvestments mechanisms such as the management buyouts or sale to other venture funds are not considered to be appropriate by VCFs in India. The growth of an enterprise follows a life cycle as shown in the diagram below. The requirements of funds vary with the life cycle stage of the enterprise. Even before a business plan is prepared the entrepreneur invests his time and resources in surveying the market, finding and understanding the target customers and their needs. At the seed

stage the entrepreneur continue to fund the venture with his own or family funds. At this stage the funds are needed to solicit the consultants services in formulation of business plans, meeting potential customers and technology partners. Next the funds would be required for development of the product/process and producing prototypes, hiring key people and building up the managerial team. This is followed by funds for assembling the manufacturing and marketing facilities in that order. Finally the funds are needed to expand the business and attaint the critical mass for profit generation. Venture capitalists cater to the needs of the entrepreneurs at different stages of their enterprises. Depending upon the stage they finance, venture capitalists are called angel investors, venture capitalist or private equity supplier/investor

Venture capital can be provided to companies at different stages. These include: I. Early-stage Financing Seed Financing: Seed financing is provided for product development & research and to build a management team that primarily develops the business plan.

Startup Financing: After initial product development and research is through, startup financing is provided to companies to organise their business, before the commercial launch of their products.

First Stage Financing: Is provided to those companies that have expended their initial capital and require funds to commence large-scale manufacturing and sales.

II. Expansion Financing Second Stage Financing: This type of financing is available to provide working capital for initial expansion of companies, that are experiencing growth in accounts receivable and inventories, and is on the path of profitability.

Mezzanine Financing: When sales volumes increase tremendously, the company, through mezzanine financing is provided with funds for further plant expansion, marketing, working capital or for development of an improved product.

Bridge Financing: Bridge financing is provided to companies that plan to go public within six to twelve months. Bridge financing is repaid from underwriting proceeds.

III. Acquisition Financing

As the term denotes, this type of funding is provided to companies to acquire another company. This type of financing is also known as buyout financing. It is normally advisable to approach more than one venture capital firm simultaneously for funding as there is a possibility of delay due to the various queries put by the VC. If the application for funding is finally rejected then approaching another VC at that point and going through the same process would cause delay. If the business plan is reviewed by more than one VC this delay can be avoided as the probability of acceptance will be much higher. The only problem with the above strategy is the processing fee required by a VC along with the business plan. If you are applying to more than one VC then there would be a cost escalation for processing the application. Hence a cost benefit analysis should be gone into before using the above strategy.


Venture capital is typically available in three forms in India, they are: Equity All VCFs in India provide equity but generally their contribution does not exceed49 percent of the total equity capital. Thus, the effective control and majority ownershipof the firm remains with the entrepreneur. They buy shares of an enterprise with anintention to ultimately sell them off to make capital gains.

Conditional Loan: It is repayable in the form of a royalty after the venture is able togenerate sales. No interest is paid on such loans. In India, VCFs charge royalty ranging between 2 to 15 percent; actual rate depends on other factors of the venture such asgestation period, costflow patterns, riskiness and other factors of the enterprise.

Income Note It is a hybrid security which combines the features of both conventionalloan and conditional loan. The entrepreneur has to pay both interest and royalty on sales, but at substantially low rates.

Other Financing Methods: A few venture capitalists, particularly in the private sector,have started introducing innovative financial securities like participating debentures,introduced by TCFC is an example.

DIFFERENCE: conventional financing, a VC financing differs in the following ways:

1. Venture Capitalists are risk takers like entrepreneurs. A conventional financier is a risk avoider as protection of funds is a prime responsibility of the financier. 2. Venture Capitalists acquires equity, a share of ownership and with it a share of risk. He does not eliminate risk but manages it through in-depth monitoring, assisting and directing his the company he has invested in through portfolio diversification. He considers himself a partner of the entrepreneur while conventional financier objective is to eliminate risk by loaning money against collateral and ensuring debt repayment capacity. 3. A Venture Capitalist specializes in management services of which finance is a part. It understands the whole scope of business to operations. Conventional specializes in financial services and has nothing to do with management or marketing to clients. 4. A Venture Capitalist has extensive operating experience and provides entrepreneurs full hands on support. Such experience is not required at all in conventional financing. 5. A Venture Capitalist injects an element of vitality and innovation into business community. The conventional financier is not equipped to provide support which new enterprises demand along side investments. A Venture Capitalist encourages entrepreneurial initiatives and innovations, which accelerate business development and the pace of national economic growth. Thus VC tries to fill the gap that exists between traditional financiers and entrepreneurs needs.


Private Placement, IPO, vendor


financing, state funding, strategic


alliance, parent company finance

Venture Capital

Angel investment, licensing self Bootstrapping(factoring, funding,





family, leasing ), microloans, financing debt, sell some assets, business credit card

Community bank



This Figure: shows venture capital & alternative financing comparison If we are struggling to find success in our quest for venture capital, may be we are looking in the wrong place. Venture capital is not for everybody. For starters, venture capitalists tend to be very picky about where they invest. They are looking for something to dump a lot of money into (usually no less than $1 million) that will pour even more money right back at them in a short amount of time (typically3-7 years). We may be planning for a steady growth rate as opposed to the booming, overnight success that venture capitalists tend to gravitate toward. We may not be able to turn around as large of a profit as they are looking for in quick enough time. We may not need the amount

of money that they offer or our business may simply not be big enough. Simply put, venture capital is not the right fit for our business and there are plenty of other options available when it comes to finding capital

The venture capital operations in India are regulated by The Securities Exchange Regulation Board of India (SEBI). The following legal instruments are in operation: SEBI Act 1992. SEBI (venture capital funds)Regulations 1996 New sector regulations issued in September 2000

Highlight of Policy and Legal Framework VCFs can be constituted as trust fund or Company. Separate vehicle for constitution and operation of venture funds such as limited liability partnership is yet to be introduced in the country

Any company or trust proposing to undertake venture capital investments is required to obtain certificate of registration from SEBI.

VCFs before raising any funds for investment are required to file placement memorandum with SEBI. Private placement memorandum can be issued only after expiry of 21 days from submission to SEBI.

VCFs can raise funds for investment through private placement route. Individual investor is required to invest minimum of Rs. 5 lakhs in venture capital fund. Raising of funds from public is restricted.

VCFs are required to invest 80 percent of funds raised in equity or equity related securities issued by companies whose securities are not listed or which are financially weak.

VCFs are barred from investing in company or institutions providing financial services venture capital funds which desire to claim exemption from income tax are required to follow rules given hereunder: Registration with SEBI. Claiming Income tax exemption in respect of dividend and capital gains income. Not more than 40 percent of equity in a venture 80 percent of monies raised for investment are required to be invested in equity shares of exchange Shares of investee companies are required to be held for a period of at least 3 years. However, these shares can be sold either if they are listed on recognised stock exchange in India. domestic companies whose shares are not listed on recognised stock

Under the SEBI's venture capital rules: VCFs can be either company or trust. There is no minimum capital adequacy requirement for venture capital funds. Are allowed to take loans, donations or issue securities. VCFs cannot be public companies - they need to contain a restriction on inviting the public to subscribe to securities. VCFs are only allowed to carry the business of venture capital fund - cannot engaged in any other business. Every VCF investor has to contribute at least Rs. 5 lacs. VCFs shall not invest in the equity capital of a financial services company. This still allows investment in financial services companies, other than by way of equity capital.

Venture capital investments are required to be restricted to domestic companies engaged in business of (i) (ii) (iii) (iv) (v) software Information Technology Production of basic drugs in pharmaceuticals sector, Bio-technology and Agriculture and allied other sectors etc.

Also in Union Budget 2002-2003 Indian companies are being permitted to invest upto US$ 100 million overseas. Indian companies are being permitted to make overseas investments in joint ventures abroad by market purchases without prior approval up to 50 per cent of their net worth

Venture capital has been a remarkable catalyst of entrepreneurial activity, after the Second World War, in many developed countries. It has led to significant growth in

industry and innovation. The prospects for the Indian VC industry are no less humongous. It is up to the industry to reflect on its current predicament and evolve a strategy to seize the opportunity.

With due emphasis being given to the industry, there is lot of scope for development. Trying to put the domestic market on par with that in the U.S. may not be justified. Capital markets in India are still growing to maturity through transparency, liquidity and accountability of promoters. With this maturity, the venture capital market would also attain its maturity. Until such time, it is not fair or easy to compare markets in India to those in the U.S. In all emerging markets, the market practice will be ahead of regulation and there could be problems galore in the process of market maturing.

Despite the slump in the new economy sectors and the collapse of the dotcoms, venture capital companies are still buoyant about the Indian technology sector and a large sum of money is waiting to be invested. According to a recent estimate by the National Association of Software and Service Companies (Nasscom), the venture capital investment in India is slated to rise to massive Rs 50,000 crore by 2008, up from Rs 2,200 crore in 2000-01.


There are some benefits to venture capital funding. In many cases, the company able to secure venture capital funds can receive services that may include: Business Consultations - Many venture capital firms have consultants on their staff that are well versed in specific markets. This can help a start up firm avoid many of the pitfalls that are often associated with start-up business ventures. See the complete Bright Hub Guide to Intellectual Property Rights Management Consultations - Unfortunately, not all entrepreneurs are good business managers. Since venture capital firms almost always require a percentage of equity in the start-up firm, they likely will have a say in how the firm is managed. For the nonmanagement expert, this can be a significant benefit.

Human Resources - In terms of finding the best talent for start up firms, venture capital firms often provide consultants who are specialists in hiring. This can help a start up firm avoid the pitfalls of hiring the wrong people for their company.

Additional Resources - Starting a new business is fraught with concerns about legal matters, payroll matters, and tax issues. It is not unusual for a venture capital firm to take an interest in providing these resources since they have a vested interest in the success of the company. In general, business resources that are provided by venture capital firms who have taken an equity position in a start up company can be invaluable to the success of the company. Many start up firms securing venture capital are able to thrive and become giants in their industries.




An effort initiated from within Home grown Faddish Increased awareness of venture capital More capital under management by VCFs Industry crossed learning curve More
Growing experienced Venture Capitalists, Intermediaries, and Entrepreneurs. number of foreign trained Limited exit option Uncertainties Political Policy repatriation, Taxation

Bureaucratic meddling and rigid official attitude Industry fragmented and polarized Mixed V.C culture. Smaller funds with illiquid investments Domestic fund raising difficult Lack of transparency & corporate governance

professionals. Global competition growing. Moving towards international standards. Offshore funds bring strong foreign ties Matured capital market system Electronic trading - through NSE & BSE Valuation addition Irreversible reform Regulatory framework evolving

Accounting standards Poor legal administration Difficult due diligence Inadequate management depth Valuation expectations unrealistic Technical difficult Negligible minority protection rights Inadequate corporate laws Poor infrastructure and Market evaluation



Growth capital for strong companies and Buyouts of weak companies due to growing global competition.

Change in government politics with respect to


Financial restructuring of over leveraged Taxation companies taking place. Acquisition of quoted small / medium cap companies. Pre money valuations low Threats from within expansion and Over


Exuberance of Investors.

Vast potential exists in turn around, MBO, Greed for very high returns


VCF is in its nascent stages in India. The emerging scenario of global competitiveness has put an immense pressure on the industrial sector to improve the quality level with minimization of cost of products by making use of latest technological skills. The implication is to obtain adequate financing along with the necessary hi-tech equipments to produce an innovative product which can succeed and grow in the present market condition. Unfortunately, our country lacks on both fronts. The necessary capital can be obtained from the venture capital firms who expect an above average rate of return on the investment. The financing firms expect a sound, experienced, mature and capable management team of the company being financed. Since the innovative project involves a higher risk, there is an expectation of higher returns from the project. The payback period is also generally high (5 - 7 years). The various problems/ queries can be outlined as follows: (i) Requirement of an experienced management team. (ii) Requirement of an above average rate of return on investment. (iii) Longer payback period. (iv) Uncertainty regarding the success of the product in the market. (v) Questions regarding the infrastructure details of production like plant location, accessibility, relationship with the suppliers and creditors, transportation facilities, labour availability etc. (vi) The category of potential customers and hence the packaging and pricing details of the product. (vii) The size of the market.


Lack of prioritization of thrust areas: VCFs in India have not prioritized high tech thrust areas for venture financing. The prioritization of thrust areas may facilitate development of technological Specialiality and expertise by VCFs. Lack of regional focus: VCFs even the state level institution lack regional focus. A regional focus could lead to concentrated efforts and specialization and could in the taking of full advantages of the regional benefits. Lack of full rage financing: All funds offer funding for early stage activities viz. seed capital and start up financing. However all start up companies do not get venture capital because of the perceived high risk. Similarly financing for expansion and rehabilitation of sick units is lacking in spite of the concessions available under the government guidelines. Lack of focus on entrepreneurial development: The focus of VCFs in India is on technology financing and rightly so, for making Indian industry globally competitive. But given the needs of India in terms of high production and productivity and employment, VCFs should adopt a broader approach on financing and supporting novel ideas of entrepreneurs, which may not necessarily be high-tech in nature. Limitations on structuring of VC funds: VCFs in India are structured in the form of a company or trust fund and are required to follow a three tier mechanism- investors, trustee company and Asset Management Company [AMC]. A proper tax efficient vehicle in the form of limited liability partnership act, which is popular in USA, is not made applicable for structuring of VCFs in India. In this form of structuring, investors liability towards the fund is limited to the extent of his contribution in the fund and also formalities in structuring of fund are simpler. Limitations on industry segments: In sharp contrast to other countries where telecom, services and software bag the largest share of VC investments, in India other conventional sectors dominate venture finance. Opening up of restrictions, in recent time, on investing in the services sectors such as telecommunication and related services, project consultancy, design and testing services, tourism etc. would increase the domain and growth possibilities of VC.

Anomaly between SEBI regulations and CBDT rules: CBDT tax rules recognize investment in financially week companies only in case of unlisted companies as venture investment whereas SEBI regulations recognize investment in financially week companies as venture investment irrespective of their listing status. If investment in financially weak companies offers an attractive

opportunity to VCFs the same may be allowed by CBDT for availing of tax exemptions on capital gains at a later stage. Also SEBI regulations do not restrict size of an investment in a company. However, as per income tax rules, maximum investment in a company is restricted to less than 20% of the raised corpus of VCF and paid up share capital in case of VC Company. Further, investment in company is also restricted upto 40% of equity of Investee Company. Returns, Taxes and Regulations: There is a multiplicity of regulator like and RBI.

Domestic venture funds are set up under the Indian Trusts Act of 1882 as per SEBI guidelines, while offshore funds routed through Mauritius follow RBI guidelines. Abroad, such funds are made under the Limited Partnership Act, which brings advantages in terms of taxation. The government must allow pension funds and insurance companies to invest in venture capitals as in USA where corporate contributions to venture funds are large. Management training: An effective management education and training programme for developing professionally competent and committed venture capital managers trained to evaluate and manage high-tech, high risk ventures is necessary. Technological competitiveness: Encouraging and funding of R&D by private and public sector companies and the government, for ensuring technological competitiveness. Marketing thrust: A vigorous marketing thrust, promotional efforts and development strategy, business incubators etc. for the growth of venture capital. Due Diligence: Review a sample due diligence request. Prepare a due diligence

VCF is in its nascent stages in India. The emerging scenario of global competitiveness has put an immense pressure on the industrial sector to improve the quality level with minimization of cost of products by making use of latest technological skills. The implication is to obtain adequate financing along with the necessary hi-tech equipments to produce an innovative product which can succeed and grow in the present market condition. Unfortunately, our country lacks on both fronts. The financing firms expect a sound, experienced, mature and capable management team of the company being financed. The payback period is also generally high (5 - 7 years). The various queries can be outlined as follows: 1. Requirement of an experienced management team. 2. Requirement of an average rate of return on investment. 3. Longer payback period 4. Uncertainty regarding the success of the product in the market. 5. Questions regarding the infrastructure details of production like plant location, accessibility, relationship with the suppliers and creditors, transportation facilities, labour availability etc. 6. The category of potential customers and hence the packaging and pricing details of the product. 7 .Less knowledge of the market size . 8. Lack of information regarding Major competitors and their market share. 9. Skills and Training required and the cost of training. 10. Problems in raising of funds 11. It is not known from whom the permission should be sought to start a venture capital activity (it is not clearly spelt out). CCI was to give permission but has been wound up now. 12. UTI-assisted funds are tax-exempt, not others. Thus, other venture capital funds are at a disadvantage. 13. Eligibility certificate is needed for capital gains tax exemption. Canfina VCF needs to get permission from ICICI, IDBIits competitors. They may not know anything about the project. Canfina-VCF has to provide them all the data.

The following things are essential for the success of venture capital in any country: 1. In order to establish a thriving venture capital industry, all economic players must participate. 2. Participate in those acquisitions that transfer technology to India. 3. VC funds should be managed by professionals with proper check & balance. 4. Documents. Prepare three documents: (i) a thoughtfully reasoned full business plan; (ii) a one to two page executive summary of the business plan; and (iii) a PowerPoint presentation. A full business plan should include a business model, financial projections and assumptions. 5. Life cycle. Know with certainty where your company is in the life cycle and target investors accordingly. Is your company in the hangar, on the runway, taking off or at cruising altitude? 6. Deregulated economic environment: A less regulated and controlled business and economic environment where attractive customer opportunities exist or could be created for high-tech and quality products. 7. Disinvestment mechanism: Existence of disinvestment mechanisms, particularly an over-the counter stock exchange catering to the needs of SMEs. 8. Broad knowledge base: A more general, business and entrepreneurship oriented education system where scientists and engineers have knowledge of accounting, finance and economics.

Venture Capital can play a more innovative and developmental role in a developing country like India. It could help the rehabilitation of sick units through people with ideas and turnaround management skills. The world is becoming increasingly competitive. Companies are required to be super efficient with respect to cost, productivity, and labour efficiency, technical back up, flexibility to consumer demand, adaptability and foresightedness. There is an impending demand for highly cost effective, quality products and hence the need for right access to valuable human expertise to guide and monitor along with the necessary funds for financing the new projects. The Government of India in an attempt to bring the nation at par and above the developed nations has been promoting venture capital financing to new, innovative concepts & ideas, liberalizing taxation norms providing tax incentives to venture firms, giving a Philip to the creation of local pools of capital and holding training sessions for the emerging VC investors. There are large sectors of the economy that are ripe for VC investors, like,. I.T., Pharma, Manufacturing. Telecom, Retail franchises, food processing and many more. By combining risk financing with management and marketing assistance , venture capital thus could become an effective instrument in fostering the development of entrepreneurship and transfer of technology on developing countries.

1. JOURNALS APPLIED FINANCE VENTURE STAGE INVESTMENT PREFERENCE IN INDIA, VINAY KUMAR, MAY, 2004. ICFAI JOURNAL OF APPLIED FINANCE MAY- JUNE VIKALPA VOLULMLE 28, APRI L- JUNE 2003 ICFAI JOURNAL OF APPLIED FINANCE, JULY- AUG. 2. BOOKS I.M. Panday- venture capital development process in India I. M. Panday- venture capital the Indian experience, 3. VARIOUS NEWS PAPERS 4. INTERNET www.indiainfoline.com www.vcapital.com www.investopedia.com www.vcinstitute.com