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What is venture capital?

Your startup is growing. You finally have cash flow. Time to enjoy? Not if you
raised venture capital. "There are certain strings attached to VC money," Kanwal
Singh, Helion, explained.

Venture capital is the term for money invested in young, fast growing companies.
Many of today's leading companies were backed by venture capital: Biocon,
Google, Oracle, Apple.

Clearly, there are benefits to venture funding, but it's not a good fit for everyone.
It's critical for an entrepreneur to understand the venture dynamics, as Balaji
Srinivas at Aureos Capital warned, "It is very important for the entrepreneur to
know why the VCs are doing what they are doing."

Venture capital (VC) is funding invested, or available for investment, in an


enterprise that offers the probability of profit along with the possibility of loss.
Indeed, venture capital was once known also as risk capital, but that term has
fallen out of usage, probably because investors don't like to see the words "risk"
and "capital" in close conjunction. Venture capitalists often don't tend to think that
their investments involve an element of risk, but are assured a successful return
by virtue of the investor's knowledge and business sense. DataMerge, a financial
information provider, says that VC investments in an enterprise are usually
between $500,000 and $5 million, and that the investor is likely to expect an
annual return of 20% to 50%.

Venture capitalists were instrumental in the enormous increase in the number of


dot-com startups of recent years. Because the Internet was a new and untried
business venue with enormous potential, many analysts feel that standard
business rules were too frequently suspended in what was a very optimistic
market. Internet-based enterprises were expected to enjoy unprecedented

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success; many venture capitalists were said to have encouraged dot-coms to
focus on scaling upward rather than on realizing early profits. According to
VentureWire, U.S. venture capital funding for 2000 was $105 billion, more than
the total funding available in all the 15 years before that. However, in April of that
same year, severe market corrections brought about a radical change in the
financial climate, and since then online businesses have been failing at rates
similar to the rates of startups in the early days of the dot-com boom. Vulture
capitalist, a term coined in the volatile financial environment of the 1980s, has
been revived to refer to the venture capitalists that have recently begun to buy up
failing dot-com enterprises at rock-bottom prices.

Venture capital is the second or third stage of a traditional startup financing


sequence, which starts with the entrepreneurs putting their own available funding
into a shoestring operation. Next, an angel investor may be convinced to
contribute funding. Generally an angel investor is someone with spare funds and
some personal or industry-related interest - angels are sometimes said to invest
"emotional money," while venture capitalists are said to invest "logical money" -
that is willing to help give the new enterprise a more solid footing. First-round
venture capital funding involves a significant cash outlay and managerial
assistance. Second-round venture capital involves a larger cash outlay and
instructions to a stock or initial public offering (IPO) underwriter, who will sell
stock in exchange for a percentage of what is sold. Finally, in the IPO stage, an
investment bank is commissioned to sell shares to the public.

In the currently sober economic climate, a return to traditional business wisdom


has meant that enterprises are generally expected to show a clear path to
profitability if they want to attract investment funds.

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What VCs look for while funding an entrepreneurship
business?

"In the world today, there's plenty of technology, plenty of entrepreneurs, plenty
of money, plenty of venture capital. What's in short supply are great teams." --
John Doerr, Partner, KPCB.

Early investors in amazon.com, Apple Computers and the Body Shop got returns
of 260, 1,692 and 10,500 times their initial investments, respectively. That's mind
boggling. Now let's look at some other numbers.

According to www.1000ventures.com, only six out of 1,000 business plans get


funded on an average. Only about 5 per cent of the business plans are read
beyond the executive summary and 10 per cent of proposals pass initial
screening. Only and only 10 per cent of these screened proposals pass due
diligence and receive funding.

The investor, at whichever stage of the venture he might be investing, as per a


report by Lehman Brothers, makes detailed evaluation of the quality of people,
quality of business and the quality of investment involved. A decision to invest is
reached after several rounds of presentations and negotiations.

The most difficult to assess is however the quality of people. As John Doerr
rightly put it, 'What's in short supply are great teams.'

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So given a great idea, a great business plan, and plenty of money, will the people
involved be able to pull the project through to make great returns possible for the
investors?

Before deciding to invest in a project, venture capitalists (for the purpose of ease,
we are using venture capitalists as the term representative of incubators, angel
investors, private equity investors and mezzanine financiers) undertake a series
of steps to evaluate the project.

Venture capital has a number of advantages over other forms of finance,


such as:

• It injects long term equity finance which provides a solid capital base for
future growth.
• The venture capitalist is a business partner, sharing both the risks and
rewards. Venture capitalists are rewarded by business success and the
capital gain.
• The venture capitalist is able to provide practical advice and assistance to
the company based on past experience with other companies which were
in similar situations.
• The venture capitalist also has a network of contacts in many areas that
can add value to the company, such as in recruiting key personnel,
providing contacts in international markets, introductions to strategic
partners.

The venture capitalist may be capable of providing additional rounds of funding


should it be required to finance growth.

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CASE STUDIES ON VENTURE CAPITAL

1. MINDTREE CONSULTING PVT. LTD


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

Founders: A number of highly experienced persons from some of the best


companies got together and worked out a plan to start a new firm. The mission
was charted out as: deliver business enabling solutions and technologies by
creating partnerships with our customers in a joyous environment for our people.
Mr. Krishna Kumar (CEO), Mr. Anjan Lahiri, . Mr N.S. Parthasarathy, Mr Ashok
Sootha, Kamran Ozair and Mr. Kalyan Banerjee are all partners of this firm.

Venture Capitalists: The first round funding was by the Founders, Global
Technology Ventures and Walden International. The first round funding was US$
9.5million. In 2001 August Mindtree secured the second round funding. This was
US$ 14.1million and this was by:
_ Global Technology Ventures
_ The founders
_ Walden International
_ Capital International and
_ Franklin Templeton Fund.

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Products and Services: Mindtree is essentially a services company. It operates
in six thrust areas namely,
_ internet Technologies
_ enterprise Integration and B2B
_ ERP and supply chain management
_ mobile platform and technologies
_ application management and
_ setting up offshore development centers.

The strength of Mindtree is its ability to leverage its vast knowledge base to
prescribe tools and architectures which will work for specific business models
and industries. The collective experience, coupled with the creation of Mindtree
Labs, ensures that the solutions will have high quality and success. The focus of
Mindtree unlike the other software firms have been to leverage intellectual
property. Mindtree helps firms to improve its product design life cycle. Mindtree
developed a set of intellectual properties to complement the product realization
service offering.. The focus of the company has been
on intensive learning. It works global firms and mostly on difficult projects and
newer state of the art areas. The main contribution of venture capitalists has
been the refinement and sharpening of the business plan.

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2. NETWORK SOLUTIONS
Network Solutions was a Venture funded company. It focuses on convergence
solutions to network problems. It has become the preferred vendor for many
firms for integrated data networks. It had an income of US$ 3 million in 1994 and
it reached US$ 19 million in 2001.

Founder: Mr. Sharma is an electronic engineer. He implemented a number of


independent projects in Asian countries such as China, India, Singapore and
Thailand. While working on these projects he started a networking service firm
for the multinationals operating in Bangalore. The main focus was designing
networks that are cost effective and reliable and identifying network architectures
that are reliable, secure, cost effective and platform independent.

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

Products and Services: Network solution provision is the business of the


company. This has 800 people working. It is India’s largest vendor independent
network and telecom infrastructure solution provider. CISCO, Nortel, HP
Cabletron are its major clients. It has become the preferred solution provider for
the large banks as well as the stock exchanges in India though it is started by a
single entrepreneur. The uniqueness of the firm is that none of its customers
have deserted it. The firm has three domains of expertise and operates at 8
major centres in India. It manages all aspects of the network lifecycle. Recently it
has started providing call centre support. It is one of five fastest growing IT
companies in India according a survey conducted by Computer Today. The
venture support by Intel Capital helped Network Solutions in enhancing the
reputation. The support provided was mostly financial in nature.

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BY WORLD REGION:

EUROPE AND ISRAEL


European and Israeli companies raised $1.8 billion in 146 disclosed rounds, up
43% from 2007. Europe and Israel accounted for 21% of the global total. The
traditionally strong energy generation sector increased its share of total
investment to 71% ($1.279 billion) from 56% ($ 703 million) in 2007, with a strong
increase in investments in wind ($322.6 million, an increase of 294% from 2007)
and solar ($589.3 million, an increase of 64% from 2007) leading the way.
Outside of the energy generation sectors, energy efficiency investing led the way,
representing 8% ($137.6 million) of the total invested.

The most significant country growth was seen in Germany ($383 million invested,
an increase of 217% from 2007) and Israel ($247 million invested, an increase of
224% from 2007), both led by very large solar deals. Germany overtook the UK
as the country receiving the most venture capital in 2008, helped significantly by
the region’s largest solar deal of 2008, the $133.7 million investment in Berlin-
based solar thin-film manufacturer Sulfurcell Solartechnik. The UK’s decline in
total investment ($337.8 million, down 11% from 2007) left it second in the
country league table, with Israel moving into third place from sixth in 2007.

CHINA:
In 2008, Chinese cleantech companies raised $430 million in 18 disclosed
rounds, up 22% from 2007. China accounted for 5% of the global total.

As expected, 2008 witnessed steady gains in clean technology investment in


China. Solar accounted for 60% of the total, reflecting the continuing migration of
solar module manufacturing from Europe and the US to China, as well as the

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opportunity of a large domestic market for solar water heating. Other active
sectors include agriculture, lighting, and wind.

The underlying fundamentals driving cleantech investment in China, including


government efficiency targets in energy, water and resource utilization, emission
reduction targets, government and corporate goals for cleaner supply chains and
industrial operations, and corporate social responsibility goals, remain in place.

INDIA:
Indian companies raised $277 million in 14 disclosed rounds, down 20% from
2007. India accounted for 3% of the global total. Although 2008 was down from
2007, new investors including Kleiner Perkins and Garage Technology Ventures,
as well as corporate investors such as Applied Materials, entered the India clean
technology market.

The clean technology sector in India remains nascent compared to more mature
markets such as North America and Europe. Much of the interest has been in
addressing the energy shortage challenges faced by the country, therefore,
energy generation and infrastructure, with solar and wind deals leading the way,
attracted the majority of investment dollars. However, new sectors received
capital, such as electronic waste recycling, energy efficiency and water
management.

NORTH AMERICA:
In 2008, U.S. companies raised $5.8 billion in 241 disclosed rounds, up 56%
from 2007. US companies accounted for 68% of the global total. Canadian
companies raised $159 million in 14 disclosed rounds, down 58 percent from
2007.

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TOP INVESTORS:

Leading clean technology investors in 2008, as measured by the number of


disclosed financing rounds the fund participated inwere:

Full-Year 2008 Top Five Most Active Clean Technology Venture Funds
Venture Capital Firm # of rounds
Khosla Ventures 21
Kleiner Perkins Caufield & Byers 18
Quercus Trust 16
RockPort Capital Partners 13
Draper Fisher Jurvetson 13
Source: Cleantech Group (cleantech.com)

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BIBLIOGRAPHY

We have derived the information for this project from

www.mycapital.com

www.indiavca.org

www.vfinance.com

www.vcindia.com

www.vccircle.com

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