VCPE Industry in India

Dayalbagh Educational Institute, Agra
Venture capital and

Private equity Industry in
India
Venture capital funding for social enterprises
Neeraj sajwan
2012-14
1 Venture Capital and Private Equity Industry in India
Acknowledgement
No Learning is proper and effective without
Proper Guidance
Every study is incomplete without having a well plan and concrete exposure to the
student. Management studies are not exception. Scope of the project at this level is
very wide ranging. On the other hand it provide sound basis to adopt the theoretical
knowledge and on the other hand it gives an opportunities for exposure to real time
situation.
This study is an internal part of our MBA program and to do this project in a short
period was a heavy task.
Intention, dedication, concentration and hard work are very much essential to
complete any task. But still it needs a lot of support, guidance, assistance, cooperation of people to make it successful.
I bear to imprint of my people who have given me, their precious ideas and times to
enable me to complete the research and the project report. I want to thanks them for
their continuous support in my research and writing efforts.
I wish to record my thanks and indebtedness to Miss Reena Ahuja, whose

inspiration, dedication and helping nature provided me the kind of guidance
necessary to complete this project.
I would also like to acknowledge my parents and my batch mates for their
guidance and blessings.
Faculty of Social Sciences - Dayalbagh Educational Institute
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EXECUTIVE SUMMARY
2009, the year, which shook the entire globe, left an unforgettable impression on the
history of the financial world. Even though India is predominantly a domestic
consumption driven economy, it suffered from global volatility and uncertainty.
During the year, there has been a slowdown in the economy across the board.
The Indian banking system has shown remarkable growth over the last two decades.
The rapid growth and increasing complexity of the financial markets, especially the
capital market have brought about measures for further development and
improvement in the working of these markets.
Venture capital is money provided by professionals who invest alongside
management in young, rapidly growing companies that have the potential to develop
into significant economic contributors. Venture capital is an important source of
equity for start-up companies. There are basically four key elements in financing of
ventures which are studied in depth by the venture capitalists stated as
Management, Potential for Capital Gain, Financial requirements & Projections and
Owners Financial Stake.
The growth drivers on Venture Industry would be:
Development of Technology especially IT and Communication
Development of Financial Markets
Development of political climate for the economy, globalization
In India, however, the potential of venture capital investments is yet to be fully

realized. There are around thirty venture capital funds, which have garnered over Rs.
5000 Crore. The venture capital investments in India at Rs. 1000.05 crore as in
1997,representing 0.1 percent of GDP, as compared to 5.5 percent in countries such
as Hong Kong.
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CONTENTS
ACKNOW LEDGEMENT
EXECUIVE SUMMARY
Chapter-1 Introduction
Chapter-2 Objective of the study
Chapter-3 Review of literature
Chapter-4 Research Methodology
Chapter-5 Data Analysis and Interpretation
Chapter-6 Conclusion
Chapter-7 Findings and suggestions
Chapter-8 Limitations
Bibliography
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Growth of the Indian VCPE industry

VCPE, made a slow start in India in the late 1960s, encouraged by development
financial institutions such as Industrial Development Bank of India, now merged into
IDBI Bank Ltd, Industrial Finance Corp. of India, which became IFCI Ltd, and
Industrial Credit and Investment Corp. of India Ltd, the earlier avatar of ICICI Bank
Ltd. Technology Development and Investment Corp. of India Ltd, or TDICI, and
Gujarat Venture Finance were also among the pioneers in the venture capital space.
These two institutions are still around with different names ICICI Venture Funds
Management Co. Ltd and GVFL Ltd, respectivelyand three of their earliest
employees are today the oldest still-active private equity fund managers in the
country, all having moved on to larger roles at larger funds.
Over the last few years, India has become one of the leading destinations for
Venture Capital and Private Equity (VCPE) investments. Though the concept of
VCPE investment prevailed in the country in one form or the other since the 1960s,
the growth in the industry was mainly after the economic reforms in 1991. Prior to
that, most of VCPE funding were from public sector financial institutions, and was
characterized by low levels of investment activity.
VC investing activity gained momentum sometime in the mid-1990s which saw the
entry of players such as HSBC Private Equity (Asia), Schroders Plc., Warburg
Pincus LIC., CDC Group Plc.(now Actis), Baring Private Equity Partners Group,
Citibank (the PE arm for emerging markets is now CVCI) and many others. Still, the
scale of funds as well as investments continued to be modest.
The contours of the PE industry have changed most significantly over the last 10
years. The scale of investments has also changed dramatically since 2004, when PE
as an asset class started getting significant attention. The years between 1995 and
2000 were the turning points in terms of PE regulations as SEBI (Securities and
Exchange Board of India) introduced VC fund regulations and framed guidelines that
were more conducive to VC/PE. Investors in VC funds, if registered with SEBI were
provided the benefit of single-point taxation for the income generated from
investments.
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The IPO (initial public offering) of Bharti Televentures Ltd (now Bharti Airtel Ltd) in
2002 and the successful divestment by Warburg Pincus which had funded Bharti
changed the tonnage of success...in India. For its investment of around $300
million during 1999-2001, it was estimated to have realized over four times its
investment. Until then, while the multiples made by the likes of ICICI Venture and
CDC on their investments ranged between 20 and 50 times, the pile of cash on each
of these investments always ended up being a couple of tens of million dollars as the
initial investments were small.
In recent years, VCPE commitments and investments in India have grown at a rapid
pace. Venture Economics data indicate that during the period 1990 99, Indias
ranking was 25 out of 64 and various VCPE fundraised $945.9 million for
investments in India. But during the next decade, 2000 09, Indias ranking rose to
13 out of 90 countries and the funds raised $16,682.5 million for investments in
India. This represents a growth of 1664%over the previous decade. The trend is
even more encouraging for the most recent five year period 2005 09,during which
Indias ranking was 10 out of 77 countries, and various funds raised $15,073.6
million for VCPE investments in India. Funds raised during 2005 09, represented a
growth rate of 837% as compared to funds raised over the previous five year period
2000 04.
The growth rate in investments made by various VCPE funds has been equally
strong. During five year period 2004-2008, the industry growth rate in India was the
fastest globally and it rose to occupy the No. 3 slot worldwide in terms of quantum of
investments. The amount invested by VCPE funds grew from US$ 1.8 billion in 2004
to US$22 billion in 2007 before tapering off to US$ 8.1 billion in 2008. During the five
year period ending 2008, VCPE investments in India grew from 0.4% of GDP in 2004
to more than 1.5% of GDP in 2008.
While it is unfortunate to be caught in this unprecedented financial environment, this
will bring in discipline among private equity players on investment processes and
valuations. We had seen unprecedented euphoria and excesses in PE investing in
India during the last three years. At least 70% of investments in private equity over
the past three years is estimated to have gone into PIPEs (private investment in
public equity) and pre-IPO placements. The short- to medium-term growth could be
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significantly lower than that projected at the time of investment and PE funds will
have to work with the management teams to cut costs and bring about operational
improvements to achieve the returns.
What is Venture Capital?

The venture capital investment helps for the growth of innovative entrepreneurships
in India. Venture capital has developed as a result of the need to provide nonconventional, risky finance to new ventures based on innovative entrepreneurship.
Venture capital is an investment in the form of equity, quasi-equity and sometimes
debt - straight or conditional, made in new or untried concepts, promoted by a
technically or professionally qualified entrepreneur. Venture capital means risk
capital. It refers to capital investment, both equity and debt, which carries substantial
risk and uncertainties. The risk envisaged may be very high may be so high as to
result in total loss or very less so as to result in high gains
Venture capital means many things to many people. It is in fact nearly impossible to
come across one single definition of the concept.
Jane Koloski Morris, editor of the well known industry publication, Venture
Economics, defines venture capital as 'providing seed, start-up and first stage
financing' and also 'funding the expansion of companies that have already
demonstrated their business potential but do not yet have access to the public
securities market or to credit oriented institutional funding sources.
The European Venture Capital Association describes it as risk finance for
entrepreneurial growth oriented companies. It is investment for the medium or long
term return seeking to maximize medium or long term for both parties. It is a
partnership with the entrepreneur in which the investor can add value to the
company because of his knowledge, experience and contact base.
Venture capital is money provided by professionals who invest alongside
management in young, rapidly growing companies that have the potential to develop
into significant economic contributors. Venture capital is an important source of
equity for start-up companies. Professionally managed venture capital firms
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generally are private partnerships or closely-held corporations funded by private and

public pension funds, endowment funds, foundations, corporations, wealthy
individuals, foreign investors, and the venture capitalists themselves.
Venture capitalists generally:
Finance new and rapidly growing companies
Purchase equity securities
Assist in the development of new products or services
Add value to the company through active participation
Take higher risks with the expectation of higher rewards
Have a long-term orientation
When considering an investment, venture capitalists carefully screen the technical

and business merits of the proposed company. Venture capitalists only invest in a
small percentage of the businesses they review and have a long-term perspective.
They also actively work with the company's management, especially with contacts
and strategy formulation.
Venture capitalists mitigate the risk of investing by developing a portfolio of young
companies in a single venture fund. Many times they co-invest with other
professional venture capital firms. In addition, many venture partnerships manage
multiple funds simultaneously. For decades, venture capitalists have nurtured the
growth of America's high technology and entrepreneurial communities resulting in
significant job creation, economic growth and international competitiveness.
Companies such as Digital Equipment Corporation, Apple, Federal Express,
Compaq, Sun Microsystems, Intel, Microsoft and Genetech are famous examples of
companies that received venture capital early in their development.
Advantages of Venture capital:
It injects long term equity finance which provides a solid capital base for future
growth.
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The venture capitalist is a business partner, sharing both the risks and rewards.
Venture capitalists are rewarded by business success and the capital gain.
The venture capitalist is able to provide practical advice and assistance to the
company based on past experience with other companies which were in similar
situations.
The venture capitalist also has a network of contacts in many areas that can add
value to the company, such as in recruiting key personnel, providing contacts in
international markets, introductions to strategic partners, and if needed coinvestments with other venture capital firms when additional rounds of financing are
required.
The venture capitalist may be capable of providing additional rounds of funding
should it be required to finance growth.
Private Equty
Private equity is an asset class consisting of equity securities in operating companies
that are not publicly traded on a stock exchange. Investments in private equity most
often involve either an investment of capital into an operating company or the
acquisition of an operating company. Capital for private equity is raised primarily
from institutional investors. There is a wide array of types and styles of private equity
and the term private equity has different connotations in different countries. Typically
these are investments by organizations rather than by individuals. While the investor
is looking for higher than market returns in QuickTime, the company is looking for
large amounts of capital to fund expansion and growth. The fund requirements would
typically be too large and the risks may be high to take the loan route. The company
may also not yet be ready to go public. Private equity investments are typically
against a minority stake (and a seat on the board).
The PE fund can be considered to be a serial investor, who is making a short-term
investment in an established company. As the Indian markets saw a revival, the
countrys private equity industry got some breathing space. But to succeed, PE
investments must be carefully planned and fully supported with a regional presence
in order to identify attractive potential opportunities and understand competitive
threats to Western companies. Indian equity market witnessed exit by several private
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equity firms and venture capital companies since the rally in equities gathered
momentum.
Overview of current conditions

Global private equity investment showed no significant increase in 2012, continuing
2011's trend towards flat growth. North America was the strongest-performing
market, while activity in Asia fell around 20% over 2011.
India saw deal activity fall from $14.8 billion in 2011 to $10.2 billion in 2012. The
number of deals, however, increased from 531 to 551 over this period, highlighting a
fall in average deal size. Not surprising, limited partners (LPs) are showing
increasing caution this year when allocating funds. In fact, 2012saw 55 funds with a
mandate to invest in India, but the total fund value allocated to India was only $3.5
billion, down from $6.8 billion in 2011. All this has been driven by the fact that 2012
was an uncertain year in India both politically and economically. Reported lapses in
governance, coupled with a lack of clarity in regulation, raised considerable concerns
about India's attractiveness as an investment destination. Despite these challenges,
the market is showing signs of maturity with all key stakeholders becoming more
comfortable with the idea of private equity (PE) funding. The latter half of 2012 also
saw the government become more proactive and bring forward some key pieces of
legislation to create greater transparency in the regulatory environment.
Fund-raising
India received only $3.5 billion of the $320 billion funding raised globally in 2012,
according to UK research firm Preqin. General partners (GPs) also adopted a
cautious approach, holding back to observe the performance of existing investments
in a turbulent environment. In 2012, 80% of funding came from overseas investors, a
theme that has been observed since the early days of private equity investment in
India. There are no indicators that this trend will change soon, with traditional
sources of PE capital in India, such as insurance companies and pension funds,
inhibited by regulation from participating in this asset class. Nonetheless, while 2013
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undoubtedly holds several challenges for PE firms, raising capital is unlikely to be

one of them. Our survey reveals that a majority of GPs rate "difficulty raising capital"
as seventh out of 11 challenges, far below concerns such as difficulty in exiting and
mismatch in valuations. What is clear is that GPs will need to differentiate
themselves to attract investors and prove they can deliver. They can do this by
demonstrating a quality track record in investing and exiting.
Deal making
The volume of deals grew only slightly, from 531 in 2011 to 551 in 2012. At 4%, this
increase is very low, in line with the overall mood of caution in the market last year.
This restraint, coupled with a decline in the total funds invested, saw deal size
significantly impacted, with average deal size falling from $28 million in 2011 to
$18.4 million in2012. Early-stage growth and venture capital (VC) have played a
critical role in deal making in 2012, with the number of early-stage deals under $10
million almost doubling to 244. Also, the top 25 deals made up only $4.3billion, as
opposed to $5.9 billion in 2011, and the average deal size at the top 25 dropped by
almost a quarter to $175million per deal last year.
Sectors that attracted the most investment last year were healthcare and IT/ITES.
The majority of deals under $10million were made in the e-commerce space, which
was a sector highlighted in Bain's India Private Equity Report
2012. The subsector continues to grow in 2013, following on the nearly doubling of
deals valued at less than $10million in the e-commerce space, from 12% in 2011 to
23% in 2012 of the total deals.
Expectations about deal activity in 2013 remain cautious but still positive on the
whole. Our interviews suggest that deal activity will see moderate growth in 2013
throughout the industry. The steps taken towards improving India's legislative
framework have made investors a bit more upbeat , and GPs suggest that more
deals will close in 2013.
Advantages of Private Equity
1) Funds gotten through private equity are crucial for the growth of industry and the
development of innovative products.
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2) Private equity funds are used for expanding working capital.

3) Private equity funds are helpful when it comes to facilitating mergers and
acquisitions.
4) Private equity funds make a companys balance sheet stronger, and help it
develop.
5) Private equity funds are a great way to obtain funds for small businesses and
start-ups that have not been able to get loans or grants.
6) The general partner runs the company, so the investing partner, or the limited
partner, cannot interfere in the management of the company.
For companies:managers
For private equity firms:the key is the Buy- to- sell philosophy
pressure to perform
measured
ash value generated for fund
investors and managerial incentives
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customers among Invest in businesses and influence their managers to produce

better results e.g. GE
n businesses and influence their managers to produce better results and
build synergies among portfolio businesses, e.g. P&G, Nestle
short/medium term or keep them in the long run.
businesses that are not closely linked

investing and in streamlining operations their businesses. In
contrast, a lot of time is wasted by corporate centers of public companies
Constant buying and selling by private equity firms result in learning curve
advantages
Different types of VCPE :-
1. Early Stage Finance

Seed Capital
Startup 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
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Turnarounds
Mezzanine/Bridge Finance
Not all business firms pass through each of these stages in a sequential manner. For
instance seep 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.
Seed up Capital
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It is an idea or concept as opposed to a business. European Venture Capital

Association defines seed capital as the financing of the initial product development
or capital provided to an entrepreneur to prove the feasibility of a project and to
qualify for startup capital.
The characteristics of the seed up capital may be enumerated as follows:
Absence of ready product market
Absence of complete management team
Product/Process still in R&D stage
Initial period/Licensing stage of technology transfer
Broadly speaking seed capital investment may take 7 to 10 years to achieve

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

It has been observed that venture capitalist seldom make seed capital investment
and these are relatively small by comparison to other forms of venture finance. The
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absence of interest in providing a significant amount of seed capital can be attributed

to the following three factors:a) Seed capital projects by their very nature require a relatively small amount of
capital. The success or failure of an individual seed capital investment will have little
impact on the performance of all but the smallest venture capitalists portfolio. Larger
venture capitalists avoid seed capital investments. This is because the small
investments are seen to be cost inefficient in terms of time required to analyze,
structure and manage them.
b) The time horizon to realization for most seed capital investments is typically 7-10
years which is longer than all but most long-term oriented investors will desire.
c) The risk of product and technology obsolescence increases as the time to
realization is extended. These types of obsolescence are particularly likely to occur
with high technology investments particularly in the fields related to Information
Technology.
Start up Capital
It is stage 2 in venture capital cycle and is distinguishable from seed capital
investments. An entrepreneur often needs finance when the business is just starting.
The startup stage involves starting a new business. Here in the entrepreneur has
moved closer towards establishment of a going concern. Here in the business
concept has been fully investigated and the business risk now becomes that of
turning the concept into product.
Startup capital is defined as: capital needed to finance the product development,
initial marketing and establishment of product facility.
The characteristics of start-up capital are:i.
Establishment of company or business- The company is either being

organized or is established recently. New business activity could be based on
experts, experience or a spin-off from R&D.
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ii.
Establishment of most but not all the members of the team- The skills
and fitness to the job and situation of the entrepreneurs team is an important
factor for startup finance.
iii.
Development of business plan or idea- The business plan should be fully

developed yet the acceptability of the product by the market is uncertain. The
company has not yet started trading.
In the startup preposition venture capitalists investment criteria shifts from idea to
people involved in the venture and the market opportunity. Before committing any
finance at this stage, venture capitalist however, assesses the managerial ability and
the capacity of the entrepreneur, besides the skills, suitability and competence of the
managerial team are also evaluated. If required they supply managerial skills and
supervision for implementation. The time horizon for startup capital will be typically 6
or 8 years. Failure rate for startup is 2 out of 3. Start up needs funds by way of both
first round investment and subsequent follow-up investments. The risk tends to be
lower relative to seed capital situation. The risk is controlled by initially investing a
smaller amount of capital in start-ups. The decision on additional financing is based
upon the successful performance of the company. However, the term to realization
of a start up investment remains longer than the term of finance normally provided by
the majority of financial institutions. Longer time scale for using exit route demands
continued watch on start up projects.
Volume of Investment Activity
Despite potential for specular returns most venture firms avoid investing in start-ups.
One reason for the paucity of start up financing may be high discount rate that
venture capitalist applies to venture proposals at this level of risk and maturity. They
often prefer to spread their risk by sharing the financing. Thus syndicates of
investors often participate in startup finance.
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Early Stage Finance

It is also called first stage capital is provided to entrepreneur who has a proven
product, to start commercial production and marketing, not covering market
expansion, de-risking and acquisition costs. At this stage the company passed into
early success stage of its life cycle. A proven management team is put into this
stage, a product is established and an identifiable market is being targeted. British
Venture Capital Association has vividly defined early stage finance as: Finance
provided to companies that have completed the product development stage and
require further funds to initiate commercial manufacturing and sales but may not be
generating profits. The characteristics of early stage finance may be: Little or no sales revenue.
Cash flow and profit still negative.
A small but enthusiastic management team which consists of people with
technical and specialist background and with little experience in the
management of growing business.
Short term prospective for dramatic growth in revenue and profits.
The early stage finance usually takes 4 to 6 years time horizon to realization. Early
stage finance is the earliest in which two of the fundamentals of business are in
place i.e. fully assembled management team and a marketable product. A company
needs this round of finance because of any of the following reasons: Project overruns on product development.
Initial loss after start up phase.
The firm needs additional equity funds, which are not available from other sources
thus prompting venture capitalist that, have financed the start up stage to provide
further financing. The management risk is shifted from factors internal to the firm
(lack of management, lack of product etc.) to factors external to the firm (competitive
pressures in sufficient will of financial institutions to provide adequate capital, risk of
product obsolescence etc.) At this stage, capital needs, both fixed and working
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capital needs are greatest. Further, since firms do not have foundation of a trading
record, finance will be difficult to obtain and so Venture capital particularly equity
investment without associated debt burden is key to survival of the business. The
following risks are normally associated to firms at this stage: a) The early stage firms may have drawn the attention of and
incurred the
challenge of a larger competition.

b) There is a risk of product obsolescence. This is more so when
the firm is
involved in high-tech business like computer, information technology etc.
Second Stage Finance

It is the capital provided for marketing and meeting the growing working capital
needs of an enterprise that has commenced the production but does not have
positive cash flows sufficient to take care of its growing needs. Second stage
finance, the second trench of Early State Finance is also referred to as follow on
finance and can be defined as the provision of capital to the firm which has
previously been in receipt of external capital but whose financial needs have
subsequently exploded. This may be second or even third injection of capital.
The characteristics of a second stage finance are:
A developed product on the market
A full management team in place
Sales revenue being generated from one or more products
There are losses in the firm or at best there may be a breakeven but the
surplus generated is insufficient to meet the firms needs.
Second round financing typically comes in after start up and early stage funding and
so have shorter time to maturity, generally ranging from 3 to 7 years. This stage of
financing has both positive and negative reasons.
Negative reasons include:
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I. Cost overruns in market development.

II. Failure of new product to live up to sales forecast.
III. Need to re-position products through a new marketing campaign.
IV. Need to re-define the product in the market place once the product
deficiency is revealed
.
Positive reasons include:
I. Sales appear to be exceeding forecasts and the enterprise needs to acquire
assets to gear up for production volumes greater than forecasts.
II. High growth enterprises expand faster than their working capital permit, thus
needing additional finance. Aim is to provide working capital for initial
expansion of an enterprise to meet needs of increasing stocks and
receivables.
Later Stage Finance

It is called third stage capital is provided to an enterprise that has established
commercial production and basic marketing set-up, typically for market expansion,
acquisition, product development etc. It is provided for market expansion of the
enterprise. The enterprises eligible for this round of finance have following
characteristics.
I. Established business, having already passed the risky early stage.
II. Expanding high yield, capital growth and good profitability.
III. Reputed market position and an established formal organization structure.
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Funds are utilized for further plant expansion, marketing, working capital or
development of improved products. Third stage financing is a mix of equity with debt
or subordinate debt. As it is half way between equity and debt in US it is called
mezzanine finance. It is also called last round of finance in run up to the trade sale
or public offer.
Venture capitalists prefer later stage investment Vis a Vis early stage investments,
as the rate of failure in later stage financing is low. It is because firms at this stage
have a past performance data, track record of management, established procedures
of financial control. The time horizon for realization is shorter, ranging from 3 to 5
years. This helps the venture capitalists to balance their own portfolio of investment
as it provides a running yield to venture capitalists. Further the loan component in
third stage finance provides tax advantage and superior return to the investors.
There are four sub divisions of later stage finance.
Expansion / Development Finance
Replacement Finance
Buyout Financing
Turnaround Finance
Expansion / Development Finance
An enterprise established in a given market increases its profits exponentially by

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

is favored by venture capitalist as it offers higher rewards in shorter period with lower
risk. Funds are needed for new or larger factories and warehouses, production
capacities, developing improved or new products, developing new markets or
entering exports by enterprise with established business that has already achieved
break even and has started making profits.
Replacement Finance
It means substituting one shareholder for another, rather than raising new capital
resulting in the change of ownership pattern. Venture capitalist purchase shares from
the entrepreneurs and their associates enabling them to reduce their shareholding in
unlisted companies. They also buy ordinary shares from non-promoters and convert
them to preference shares with fixed dividend coupon. Later, on sale of the company
or its listing on stock exchange, these are re-converted to ordinary shares. Thus
Venture capitalist makes a capital gain in a period of 1 to 5 years.
Buy - out / Buy - in Financing
It is a recent development and a new form of investment by venture capitalist. The

funds provided to the current operating management to acquire or purchase a
significant share holding in the business they manage are called management
buyout.
Management Buy-in refers to the funds provided to enable a manager or a group of
managers from outside the company to buy into it.
It is the most popular form of venture capital amongst later stage financing. It is less
risky as venture capitalist in invests in solid, ongoing and more mature business. The
funds are provided for acquiring and revitalizing an existing product line or division of
a major business. MBO (Management buyout) has low risk as enterprise to be
bought have existed for some time besides having positive cash flow to provide
regular returns to the venture capitalist, who structure their investment by judicious
combination of debt and equity. Of late there has been a gradual shift away from
start up and early finance to wards MBO opportunities. This shift is because of lower
risk than start up investments.
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Turnaround Finance
It is rare form later stage finance which most of the venture capitalist avoid because
of higher degree of risk. When an established enterprise becomes sick, it needs
finance as well as management assistance foe a major restructuring to revitalize
growth of profits. Unquoted company at an early stage of development often has
higher debt than equity; its cash flows are slowing down due to lack of managerial
skill and inability to exploit the market potential. The sick companies at the later
stages of development do not normally have high debt burden but lack competent
staff at various levels. Such enterprises are compelled to relinquish control to new
management. The venture capitalist has to carry out the recovery process using
hands on management in 2 to 5 years. The risk profile and anticipated rewards are
akin to early stage investment.
Bridge Finance
It is the pre-public offering or pre-merger/acquisition finance to a company. It is the

last round of financing before the planned exit. Venture capitalist help in building a
stable and experienced management team that will help the company in its initial
public offer. Most of the time bridge finance helps improves the valuation of the
company. Bridge finance often has a realization period of 6 months to one year and
hence the risk involved is low. The bridge finance is paid back from the proceeds of
the public issue.
Factors to be considered by VCPE in selection of investment

proposal
1. Management-: The strength, expertise & unity of the key people on the board
bring significant credibility to the company. The members are to be mature,
experienced possessing working knowledge of business and capable of taking
potentially high risks.
2. Potential for capital gain-: An above average rate of return of about 30 - 40% is
required by venture capitalists. The rate of return also depends upon the stage of the
Page 22
business cycle where funds are being deployed. Earlier the stage, higher is the risk
and hence the return.
3. Realistic Financial Requirement and Projections- The venture capitalist
requires a realistic view about the present health of the organization as well as future
projections regarding scope, nature and performance of the company in terms of
scale of operations, operating profit and further costs related to product development
through Research & Development.
4. Owners Financial Stake-: The financial resources owned & committed by the
entrepreneur/ owner in the business including the funds invested by family, friends
and relatives play a very important role in increasing the viability of the business. It is
an important avenue where the venture capitalist keeps an open eye.
Social enterprises and impact investments: Overview

The need for social innovation
Innovation is among the most important functions of any business enterprise.
Constant innovation and generation of ideas is critical for all aspects of business - be
it to respond to competition and changing trends or to improve efficiencies or to
attract new customers. Companies like Apple, Microsoft and Google are popular
examples where innovation has been the order of the day. That said, innovation and
generation of new ideas are anything but easy. This process becomes even more
complex in a social enterprise, because of the constraints in funding and difficulties
involved with creating a market where demand does not already exist.
The compulsion to reduce negative impacts of the product/service on the intended
beneficiaries and the concern that donors may not fund risky innovations are major
challenges faced by the social entrepreneurs. Nevertheless, small but significant
steps in innovation are definite must-haves in the social sector. While there is vast
information on innovation in conventional businesses, the discussion on innovation in
the social sector has been comparatively limited. In general, social sector seeks to
address major challenges - be it in providing better food, housing and healthcare,
improving lifestyles, reducing poverty levels, providing education, catering to
Page 23
financial needs, or protecting the environment. As for-profit companies in the social

sector strive to create the desired social impact as well as earn financial returns, it
becomes imperative to find new ways of doing business, improve efficiencies, cut
down costs, reach a larger audience and keep up with changing market dynamics.
Innovation calls for high investment and continuous financial support. Governments
and philanthropic organizations have tried to improve the lifestyle of people living at
the Base of the Pyramid (BoP) by providing grants and other forms of support for
decades. However, grants, subsidies, donations, and other forms of philanthropic
capital have not been effective in supporting innovation. This gap in innovation
funding for the social sector has led to the emergence of a new class of capital Social Venture Capital (SVC) or impact investing. Like the traditional venture
capitalists, the SVCs not only provide capital, but also encourage innovation and
play a vital role in guiding and mentoring the social entrepreneur.
Research Methodology
REDMEN & MORY defines, Research as a systematized effort to gain now
knowledge.
It is a careful investigation for search of new facts in any branch of knowledge. The
purpose of research methodology section is to describe the procedure for conduction
the study. It includes research design, sample size, data collection and procedure of
analysis of research instrument.
Research always starts with a question or a problem. Its purpose is to find answers
to questions through the application of the scientific method. It is a systematic and
intensive study directed towards a more complete knowledge of the subject studied.
RESEARCH DESIGN:
Acc. to Kerlinger, Research design is the plan structure & strategy of investigation
conceived so as to obtain answers to research questions and to control variance.
Acc. to Green and Tull, A research design is the specification of methods and
procedures for acquiring the information needed. It is the overall operational pattern
or framework of the project that stipulates what information is to be collected from
which sources by what procedures.
Its found that research design is purely and simply the framework for a study that
guides the collection and analysis of required data.
Page 24
Research design is broadly classified into
Exploratory research design
Confirmatory research
Descriptive research design
Casual research design
This research is a Confirmatory research. The major purpose of this research is

description of state of affairs as it exists at present.
DATA COLLECTION
Secondary data
Secondary data is the data which is already collected by someone and complied for
different purposes which are used in research for this study. It includes:
Internet
Magazine
Journal
Newspaper
The social enterprise

Broadly, enterprises that are engaged in the making of products or services that
benefit people from the low-income or BoP segments in a cost effective and
sustainable manner can be called as social enterprises. They are engaged in a
range of activities: from reducing poverty levels to improving living standards, from
providing affordable housing to financial solutions, and from improving education
levels to providing healthcare to people in the BoP.
Social enterprises are increasingly being set up as entities incorporated under the
Companies Act, 1956. When set up as a corporate form they can either be a nonprofit enterprise or a for-profit enterprise. For-profit social enterprises aim to build a
profitable business in addition to creating a social impact. A company structure also
enables to get investment from external sources of capital such as venture capital
funds.
Compare the salient features of different sources of capital for social enterprises.
The choice of funding depends on various factors such as the sector, background of
Page 25
the entrepreneur, stage of the enterprise, nature of business model, and the outputs
of the enterprise.
Sources of capital
Parameter
Banks
Grants & Donations
Promoter equity
Venture capital
Quantum of
finance
Limited - depends
on credit rating and
amount of equity in
capital structure
Limited
Depends on the
financial capacity
of the promoter
Large - depends on
Company
performance, social
impact achieved
and valuation
Financing need
Depends on type of
finance - term loan
or working capital
Long term and
short
term
Project specific
Any business
need
Any business need
Repayment
Interest and
principal
to be serviced
promptly
Not applicable
Own source hence repayment

has no timeline
By secondary sale
of
shareholding
Effect on cash
outflows
Regular cash
outflow
to meet interest
payments
No equity dilution
Not applicable
No effect
No effect
No equity dilution
Not applicable
Equity stake to be
given up by the
entrepreneur
Loss of control
in decision
making
To a limited extent
No loss of control
No loss of control
Major decisions
may have to be
approved by the
investor
Mentoring and
business
advice
Banks normally do
not get involved in
Providing
mentoring or
advice
Limited
Not applicable
Investors play an
active role in
mentoring and
advising post
investment
Enhanced
company
visibility
Limited
Limited
High
High
Tenure of
funding
Dilution of
entrepreneurs
shareholding
Long term and

short term
Long term Long

term (6 - 8
years)
Page 26
Social entrepreneurs, those who start social enterprises, can be broadly classified
into three categories based on their background. The first type would comprise an
entrepreneur who is actually from the BoP. An entrepreneur of this type wishes to
create a change in the society and his conviction comes from having been part of the
problems that the social enterprise seeks to address. Founders of Bangalore-based
SnehadeepTrust for the Disabled are three visually impaired individuals who wish to
address problems which are similar to what they faced in life through their social
enterprise. The second type is one who has had a successful career in the past, and
is financially well off. The objective of starting a social enterprise for such an
entrepreneur is to contribute something back to the society. Bangalore-based
Janaagraha is an example of this. The third type is one who is in the early stages of
his professional career or is a first generation entrepreneur, who identifies a
business opportunity in the social sector and enters this space as a social
entrepreneur on the expectation of good commercial returns. Since such
entrepreneurs may not have the necessary financial resources, they usually seek
external capital from other sources as venture capital, grant bodies, etc.
Venture capital funding for social enterprises
The objective of the VC investors in the social sector is to create a social impact
through the investment, while expecting to earn financial returns from the investment
made. There are some organizations like Michael & Susan Dell Foundation which
was earlier working only on the grants model, but has now started making equity
investments in the organizations that they support. Such organizations, which have
been supporting the social sector for long by means of grants, have started adopting
the venture style of investing to make their investments more effective.
Common terminologies of social venture funding

SVC funding is known by several other names in different parts of the world.
According to the Monitor Institute on social impact investing, SVC funding is also
known as Socially Responsible Investing, Blended Value, Impact Investing, MissionFaculty of Social Sciences - Dayalbagh Educational Institute
Page 27
Driven Investing, Mission-Related Investing, Triple-Bottom Line, Social Investing,

Values-Based Investing, Program Related Investing, Sustainable and Responsible
Investing, Responsible Investing, Ethical Investing and Environmental, Social, and
Governance Screening. Sometimes, this kind of investment is also known as Patient
Capital, as the investment timeframe of social sector venture capitalists can be
longer than what it is for traditional venture capitalists. Some terms such as Impact
Investing cover a wider universe of asset classes such as equity, debt, working
capital lines and loan guarantees. However, impact investments are structured
similar to venture capital investments, and hence the term is often used
synonymously. Despite differences between these forms, there is a common theme
that cuts across all of these forms of investment, thereby enabling them to be
grouped under the broader umbrella of social venture investing.
The following are some definitions of Social Sector VC funding:

Socially Responsible Investing:
(a) Socially responsible investing, also known as sustainable, socially conscious,
"green" or ethical investing, is any investment strategy which seeks to consider both
financial return and social good.
(b) Socially responsible investing is an investment strategy employed by individuals,
corporations, and governments looking for ways to ensure their funds go to support
socially responsible firms. Such funds deploy negative screening criteria, i.e., not
invest in companies that qualify certain social criteria such as companies in
tobacco, alcohol, or gambling.
Blended Value: Blended value refers to a business model that combines a

revenue-generating business with a component which generates social-value
.
Impact Investing: Impact investments are investments made into companies,
organizations, and funds with the intention to generate measurable social and
environmental impact alongside a financial return. These funds tend to have
inclusive, rather than exclusive mandates for example, they will only invest in
companies impacting the BoP in certain regions.
Page 28
Mission-Driven Investing: Investing that has a double bottom line focused on

achieving both financial and social returns
.
Mission-Related Investing: Mission related investing (MRI) is the term used to
describe investments made by philanthropic entities in the pursuit of both financial
and social returns. MRI implies proactively seeking investment opportunities that
produce a blend of financial returns and social impact that are in line with the
philanthropys mission.
Triple-Bottom Line: (a) The triple bottom line (abbreviated as TBL or 3BL, and also
known as people, planet, profit or "the three pillars") captures an expanded spectrum
of values and criteria for measuring organizational (and societal) success: economic,
ecological, and social.
(b) Financial, social, and environmental effects of a firm's policies and actions that
determine its viability as a sustainable organization.
Values-Based Investing: Values-Based investing is an investment philosophy that

considers criteria based on social and environmental values alongside financial
returns when selecting an investment opportunity.
Program Related Investing: Program-related investments are investments made by

foundations to support charitable activities that involve the potential return of capital
within an established time frame.
Responsible Investing: Responsible investment is an investment strategy which

seeks to generate both financial and sustainable value. It consists of a set of
investment approaches that integrate environmental, social and governance and
ethical issues into financial analysis and decision-making.
Ethical Investing: Ethical investing gives individuals the power to allocate capital
toward companies that are in line with their personal views, whether they are based
on environmental, religious or political precepts.
Page 29
Environmental, Social, and Governance Screening: Environmental, social and

corporate governance, also known as ESG, describes the three main areas of
concern that have developed as the central factors in measuring the sustainability
and ethical impact of an investment in a company or business.
Differences between mainstream VC funding and social VC funding
Social venture funding can happen from any of the following sources: venture funds
that are dedicated for investments only in the social sector (for example Acumen
Fund), venture funds that also incidentally invest in social businesses (for example
Ventureast), and other sources that are not structured as a traditional VC fund
partnership, but follow a style of investing practiced by VC investors (for example,
Dell Foundation). The basic theme of investing by SVC funds and mainstream VC
funds is the same - that is, investing in companies which help them earn attractive
financial returns. The biggest difference between these two forms of investing is that
SVCs invest with the aim of creating an impact in the low income or BoP segments
(synonymously referred to as social impact in this report), while conventional
investors do not explicitly consider the social impact for their investment decisions. In
order to make the funding a success for both the investor as well as the
entrepreneur, SVC funds need to adapt the conventional venture industry practices
to meet the requirements of their target segments.
Parameter
Mainstream VC funding
Social VC funding
Investment
selection
Based on company financials,

company growth prospects, sector
growth prospects, management
quality and the risk involved in the
investment.
Based on the social impact

created, financial returns
expected, company growth
prospects, sector growth
prospects, management quality
and the risk involved in the
investment.
Investment
monitoring
Financial performance and

business related non-financial
factors like client additions,
Monitoring the social impact in

addition to all the other
parameters of a mainstream VC
Page 30

expansion benchmarks etc.
Exit routes
Exit route of VC investor can be by

means of a stake sale to other
investors, a trade sale or a
strategic sale, sale of investors
shares back to the company
or an Initial Public Offer (IPO).
Sale to other investors and

strategic sale are more popular
exit routes compared to IPO.
Typical investment range
Between $2 - $10 million
= $1 million. However some funds

also make larger investments
Typical duration of Investment
4 to 6 years
6 to 8 years; Sometimes longer

(Acumen Fund
invests for up to 15 years)
Typical return expectations
IRR of 25%
IRR of 15% - 18% in addition to

social returns from the investment
Risk tolerance
Lower than social VC investors
Higher than mainstream VC

investors
Typical Investors in theVC fund
99% by Limited Partners (LPs)

which can be pension funds,
insurance companies, hedge funds,
endowments, corporates, high
net-worth individuals or
Governments. 1% by General
Partners, who are the actual
venture capitalists who manage
the fund
Donations and investments from

philanthropic institutions,
individuals and foundations, high
net-worth individuals and
institutional investors. Some funds
raise monies from banks, NABARD,
commercial organizations and
retail individual investors
Fund Life
Generally 10 years with investing

life cycleof 3-5 years for each fund
Generally long-term and more

than 10 years
Returns to the
fund
Management fee (ranging

between 1.5% and 2.5% of funds
under management) and a profit
share or carried interest (ranging
between 15% - 25% of profits).
The size and success of the fund
usually determine which end of
the spectrum they can demand
from the investors
Management fee paid to the VC

fund is normally in the range of
1%-1.9% due to the lower returns
from the investments made
Table 1.2: Key differences between mainstream and social VC fu

$
Page 31
Global trends in social venture funding

With Governments across the world finding it increasingly difficult to fund social
sector activities, private capital have become more and more popular in recent times.
According to a report by the Monitor Group in2009, the impact investing industry was
estimated to grow from $50 billion to $500 billion in assets within a decade. This
translates to a CAGR of 25% for the global impact investing industry. The long
debatable issue and a source of criticism of impact investing was that the two factors
of creating social impact and earning commercial returns do not go hand in hand and
that one has to be compromised for the other. However, this need not be the case
always. JP Morgan, Rockefeller Foundation and the Global Impact Investing Network
(GIIN) brought out a report in November 2010 which estimated that the potential
profit for impact investors globally across five sub-sectors (housing, rural water
delivery, maternal health, primary education and financial services) could range
between $183 billion - $667 billion over the next 10 years for an invested capital of
$400 billion - $1 trillion. Last year, The Aspen Network of Development
Entrepreneurs (ANDE) counted about 199 impact investing funds globally. The
popular social venture capital firms include Acumen Fund, First Light, Gray Ghost
Ventures, Root Capital, TBL Capital, and Underdog Ventures among others. Most of
these funds look at the developing and underdeveloped world, as these regions have
a large potential as well as need for social development. In fact, many global social
VC funds have dedicated funds looking at investing in different countries of Africa
and Asia. As the sector is growing and more opportunities for funding are being
thrown open, new social VC funds coming up in different parts of the world every
year. Worldwide, the social sector and social sector investing has been a constant
source of innovation. New securities linking social impact to financial returns and
new tools of finance are being created to earn returns out of social activities.
Specialized agencies like Endeavor and Social Finance help social entrepreneurs
gain access to global markets. Social impact bonds are another invention by many
Government agencies in UK, USA, Canada, Australia and Israel, which reward
investors according to results achieved. These involve investments of private capital
from either philanthropists or commercial investors to fund social sector initiatives.
After a specified time limit, the social impact is measured. If the social impact
achieved is as desired, the investors are rewarded; if not, investors lose the invested
Page 32
capital. It is believed that social VC funding is an effective way of unlocking private

capital and directing the much needed funds to the social sector across the globe.
Current status of social venture funding in India
Measurement of poverty in India has been a debatable issue for long as there is no
standard measure of poverty in the country. Different sources give out different
statistics with regard to poverty numbers. World Bank indicated that 32.7% of the
countrys population lived below the international poverty line of $1.25 per day in
2010, while 29.8% of the countrys population was below the national poverty line in
the same year. The Tendulkar Committee in India held 37% of the countrys
population to be below the poverty line in 2010, which has been accepted by the
Planning Commission as well. Irrespective of the actual proportion of the
population living below the poverty line, it is apparent that the number of people who
are poor is large in India. What is more shocking is that 8 Indian states (including the
states of Bihar, Uttar Pradesh and West Bengal) have more poor people than the
total poor people living in 26 of Africas poorest nations With such a large proportion
of people living below the poverty line in India and the vast amount of development
possible in both rural as well as urban areas, the potential for social venture
investing is considered promising. Indias social sector venture funding has gained
popularity in recent years, thanks predominantly to the microfinance sector. Though
impact investing has become popular in India in recent years, it still falls significantly
behind traditional venture capital and private equity investments, with the amount
invested being very low compared to traditional VC funding. A senior advisor in
investment banking firm Resurgent India opines that in India, it will take at least
another 7-9 years before impact investing reaches levels where traditional venture
capital and private equity investments are today According to the Planning
Commission, India has about 17 funds which operate in this sector. However, if
alone-off investments are considered it is estimated that there are more than 100
funds operating in this segment in India. The most popular funds are Aavishkaar, Lok
Page 33
Capital, Acumen Fund, Bellwether, Grassroots, Michael and Susan Dell Foundation,
Omidyar Networks, Oasis Fund, Gray Matters Capital and Units among others. VC
funds specializing in social sector investments have their own preferences in
balancing social returns and financial returns. Table captures the key parameters of
important social VC funds in India.
Illustrative list of some popular social VC funds operating in India

Fund name
Aavishkaar
Lok Capital
Acumen
Fund
Unitus
Oasis Fund
Gray Matters
Capital
Sector
focus
Agriculture and
Dairy,
Education,Energy
,
Handicrafts,
Health, Water
and Sanitation,
Technology for
Development
and
Microfinance and
Financial
Inclusion
Financial
inclusion,
education,
healthcare
and
technology
Health,
water,
energy,
education
and
agriculture
Rural
distribution,
Microfinance
and financial
inclusion, IT
services and
Education
Affordable
housing,
healthcare,
education,
energy,livelih
ood
opportunities,
water and
sanitation
Information,
communicatio
n
and
technology
space to
bridge
the urbanrural
digital gap
Investment
size
(million)
$0.05 - 9
Fund
investors
Development
Finance
Institutions,
Apex Indian
Banks,
Corporates,
Foundations
and retail
individual
Indian investors
Information
not
available
Philanthropi
c
donations
from local
and foreign
individuals,
institutions,
foundations
Information
not available
Managed by
Bamboo
Finance;
Targets high
net worth
and
institutional
investors for
funds
Foundations
like Rockdale,
Rockefeller
and
Global
Investment
Initiative,
among others
Aim of
investment
Invest into early

and growth
stage companies
that provide
products or
services to Tier
2 and lower
towns,
semiurban
and rural
parts of India
To promote
inclusive
growth by
supporting
the
developmen
t of social
enterprises
to deliver
basic
services to
serve the
Potential to
create
significant
social
impact,
show
financial
stability
within 5-7
years and
potential to
achieve
To reduce
global poverty
through economic
selfempowerment
To create
significant
social impact
while earning
attractive
financial
returns
Look at
opportunities
considering
market
demand and
social impact
$0.2 - $5
$0.3 - $2.5
$ $0.6 - $15
$3 - $7
Information
not available
Page 34

BoP
segment
scale
Stage of
Investment
Early stage
Across all
stages
Across all
stages
Across all
stages
Across all
stages
Information
not available
Instrument
Generally a mix
of common
equity and
convertible
debentures.
When
appropriate,
other venture
capital
instruments are
used
Equity
Equity or
Debt or
QuasiEquity
instruments
Equity or Debt
or Structured
Products
Equity
Information
not available
2+1
charitable
trust
Information
not
available
Information
not available
Information
not available
Information
not available
16
Number of
Funds
Number of
Investment
>45
39
Table 1.3: Illustrative list of some popular social VC funds operating in India
Benefits of social venture funding

Social VC funds are essentially early stage risk capital investors, funding social
enterprises when no other source of finance looks feasible. The crucial role of VC
funding in starting Servals Automation (a company that manufactures energy
efficient burners) was highlighted by the founder Mukundan. He said, If Aavishkaar
hadnot invested, probably there wouldnt have been a major activity. Frankly I would
not have got into it. Aunique feature of the VC funding at this stage is that the
investment is made when there is no proven product or service. Although grants
have been the most popular source of finance for social enterprises for long, they are
not considered as scalable and does not help the social enterprise to grow quickly.
As Vortex Engineerings (a company that manufactures ATM's for rural areas)
founder Kannan stated, Grants are not repeatable and not scalable. Normally the
grant giving agency has the mandate to disburse certain amount of money, and the
decision makers there are concerned about doing the disbursals on some
acceptable quality projects. But they do not have a larger commitment to it.
Page 35
On the other hand, by making larger investments, VC investments help their investee
companies to scale faster. This leads to a scaling of the impact created by these
companies as well. For example, Bihar based Husk Power Systems has received
investment from a number of investors since it started operations in 2008. The
company, which started with serving one village in Bihar, as a result of the funding,
has today expanded operations to 848 Information
not available other villages across Bihar, and is planning to expand to other parts of
India and Africa.45Further, an increased network also facilitates investments from
mainstream VC investors when the company achieves scale. Presence of a VC
investor also helps the investee company to command a better valuation for
subsequent financing rounds. VC funding helps to increase the equity base of the
company, which can then be leveraged to attract debt capital. Because the
investment is in the form of equity, VC funding also indirectly helps the investee
company by meeting the eligibility criteria requirements of large projects. As
indicated by Water life Indias (a company that supplies drinking water to rural and
peri-urban areas) founder Sudesh, "Increase in equity also makes the company bid
for some large projects, which would not have been possible at lower levels of
equity". Further rounds of investments are also scalable, with each round seeing a
higher infusion than the previous round. For example, Vortex Engineering, which
received Rs. 30 lakhs from its first investor in 2005, saw a progressive increase in
investment amounts in every subsequent round, with the company raising up to Rs.
37 crores in December 2011. The long duration of the VC investment also helps in
building trust among all stakeholders of the company.
A key benefit of venture
investors is their ability to provide management inputs in the company they have
invested. Since venture funds invest in the form of equity, such managerial inputs
and value additions help in increasing the valuation of their investee companies,
which in turn help the investors to achieve a better return on their investments. VC
funding is a valuable source of motivation and support at different stages of the
innovation lifecycle. A VC firm comes with extensive experience on the back of
investing in companies across different sectors and businesses. and is able to
provide the entrepreneur valuable inputs on different fronts. VC funds help in
strengthening internal systems and processes, assist in building a strong team and
help in strategizing and taking business decisions. In short, VC funding gives the
social enterprise a partner for both the risks and rewards of the business. Vortex
Page 36
Engineerings CEO Vijay Babu agreed, .In fact we would not be where we are
without the active investment by the investors and the trust the investors had in the
product and the team. Its a huge risk that the investors had takenwithout them it
would be impossible to develop such a product.
Yet another key benefit of VC funding is increased visibility and networking. Many
social sector companies are confined to a particular area and are unable to scale
and succeed despite having exceptional business models. VC funds help their
companies to get increased visibility and recognition through their network of
contacts. This also automatically increases the social entrepreneurs professional
network, helping him explore newer markets and opportunities. Vortex Engineerings
Kannan opined, With VC funding, you become a part of abrader fraternity, which
gives you access to networks. Moreover, it gives you credibility, than if you are a
lone ranger trying to prove that you are a credible person. And when you need to
meet some potential customer or you need to raise additional finance, the kind of
investor you are already associated with, what that investor has to say about his
conviction in your business model - all these definitely help a great deal. A similar
thought was expressed by Servals Automations Sujatha when she said, "Having a
[social] VC investor on board is a good endorsement of the mission of the business
itself. The investor is like a brand ambassador. This is an intangible, but good
marketing collateral. You cannot say that with banks; you can say that with social
investors.
VC funding helps the social enterprise to improve their corporate governance
practices. Companies are often required to set right the books and accounts and
have proper legal documentation, which help in overall improvement in regulatory
compliance. A VC firm undertakes detailed due diligence of a prospective investee
firm before making an investment. It is said that going through the process of due
diligence in itself helps the company in strengthening their internal processes. This
was corroborated by Vortex Engineerings CFO Indira, their [VC's] due diligence
process helped us identify the business structure we need to put in place; from a
situation where we would struggle to provide the social impact matrix required by
various investors every quarter, we are now in a position to send it ahead of them
[the VC's] asking us.
Concerns of exuberance in social venture investments

Page 37
Over the past few years, impact investing has increasingly come under the limelight,
both internationally and in India. The increasing popularity and expectations from
impact investments has led many to believe that a bubble is building up, as was
already witnessed in the microfinance space. It is problems in the society can be
solved if a company receives funding from impact investors. As Aavishkaar's founder
Vineet Rai puts it, The hype around impact investing far outweighs reality. There
are also cases when entrepreneurs show impact targets which are highly unrealistic,
simply to secure funds. However, the societal problems require years of work before
the intended results can be achieved. The gap between what is promised and what
is being delivered is being seen in several impact investments across the country,
resulting in problems within the sector. The focus and spotlight on the sector
increased considerably in 2010, when JP Morgan classified impact investments as a
separate asset class. The study also highlighted huge profit potential for such
investments, resulting in an increased outcry against the concept of impact
investments. With an increasing number of impact investments, the industry has
came under criticism that this strong momentum could result in a conflict between
social and financial objectives. In fact, this is one of the main challenges seen in
social VC investments. Although a social VC fund gives importance to the social
impact created, financial performance of the investment assumes equal importance
in most cases. As a result, critics are of the view that the social entrepreneurs intent
may get stifled by the investors aspiration to earn higher returns. This is especially
true when the entrepreneur dilutes a majority stake in his company to secure the
funding, resulting in marginalisation of his interests. When the entrepreneur begins to
follow the investors directives to increase financial returns, it could dilute the long
term objectives of the social enterprise, leading to sub-optimal levels of impact
creation. Besides, the increasing focus on returns can also result in a pressure to
scale and grow fast. However, social venture capital is also known as patient capital,
meaning that this form of investing requires time and patience. As in the case of the
microfinance sector, the desire to earn high profits in a short time can hamper the
entire industry. The pressure to scale can also sometimes de-motivate the social
entrepreneurs, as indicated by
Servals Automations founder Mukundan, the relentless pursuit of scaling, can
liquidate the passion of the entrepreneur.
Page 38
Another concern in this space is that it is extremely difficult to measure social

returns. As social investors also look at the social impact created, it becomes
imperative to measure the social returns created by the investment. Most SVC funds
follow a proprietary model to measure social impact, as there is no uniform standard
available. The new Impact Reporting and Investment Standards which is being
developed by theGlobal Impact Investing Network seeks to develop a standardized
framework for measuring the social performance of impact investments. Comparison
across investment performance should be possible as moreand more investors
adopt this approach.
Summary
The need to marry social motive and commercial gains often leaves social
entrepreneurs grappling with several issues and challenges. Social enterprises
usually operate in challenging market conditions, dealing with a difficult customer
base with limited resources and suppliers with limited capabilities. Products and
services offered are usually in the push category, requiring extensive marketing.
Attracting and retaining human resources could be a lot more challenging for social
enterprises as the sector offers a lower pay as compared to corporate. A social
enterprise is bound by far higher regulations and legislations compared to traditional
business as the products and services offered are targeted at the low income and
BoP segments, which constitute a majority of the countrys electorate. Regulatory
hurdles and setbacks are common in a social setup and social entrepreneurs often
require in-depth knowledge to overcome these challenges. Because of the
aforementioned challenges, social ventures find it very difficult to obtain investments
from commercial capital sources in the early stage. Traditional sources of finance for
the social sector like bank debt, grants, donations and promoters equity come with
their own limitations. The difficulties in acces sing long-term capital have restricted
growth for many social enterprises, resulting in confining their operations to a
restricted geographical area. SVC funds have resulted in the emergence of a new
source of capital for the social enterprises. Apart from providing capital, SVC funds
have provided valuable management to the social enterprise such as mentoring, fine
tuning the business model, and offering guidance on various aspects of
running an enterprise. They have also encouraged social entrepreneurs to grow and
scale their operations, both for better returns as well as impact.
The impact
Page 39
investment industry is still in its early growth phase. Given the potential of impact
investments for social development, it is hoped that the industry would evolve in a
form and fashion, which addresses the various concerns expressed by different
stakeholders.
Venture Capitalists in Indian have notice of newer avenues and
regions to expand. Venture Capitalists have moved beyond IT service but are
cautious in exploring the right business model, for finding opportunities that generate
better returns for their investors.
In terms of impediments to expansion, few concerning factors to include; Venture
Capitalists unfavorable political and regulatory environment compared to other
countries, difficulty in achieving successful exists and administrative delays in
documentation and approval.
In spite of few non attracting factors, Indian opportunities are no doubt promising
which is evident by the large number of new entrants in past years as well in coming
days. Nonetheless the market is challenging for successful investment.
Therefore Venture capitalists responses are upbeat about the attractiveness of the
India as a place to do the business.
Findings
During the preparation of my report I have analyzed many things which are
following:
A number of people in India feel that financial institution are not only
conservatives but they also have a bias for foreign technology & they do not trust
on the abilities of entrepreneurs.
Some venture fails due to few exit options. Teams are ignorant of international
standards. The team usually a two or three man team. It does not possess the
required depth In top management. The team is often found to have technical
skills but does not possess the overall organization building skills team is often
short sited.
Venture capitalists in India consider the entrepreneurs integrity &urge to grow as

the most critical aspect or venture evaluation.
Page 40
Limitations of Study
The biggest limitation was time because the time was not sufficient as there was
lot of information to be got & to have it interpretation
The data required was secondary & that was not easily available.
Study by its nature is suggestive & not conclusive.
Expenses were high in collecting & searching the data.
Suggestions
The investment should be in turnaround stage. Since there are many sick
industries in India and the number is growing each year, the venture capitalists
that have specialized knowledge in management can help sick industries. It
would also be highly profitable if the venture capitalist replace management
either good ones in the sick industries.
It is recommended that the venture capitalists should retain their basic feature
that is tasking high risk. The present situation may compel venture capitalists to
opt for less risky opportunities but is against the spirit of venture capitalism. The
established fact is big gains are possible in high risk projects.
There should be a greater role for the venture capitalists in the promotion of
entrepreneurship. The Venture capitalists should promote entrepreneur forums,
clubs and institutions of learning to enhance the quality of entrepreneurship.
BIBLIOGRAPHY
WEBSITE:
www.sebi.gov.in
www.ivca.org
www.nenonline.org.
Page 41
www.indiavca.org.
www.vcindia.com
www.ventureintelligence.in
www.vccircle.com
Page 42

VCPE Industry in India

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VCPE Industry in India

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Dayalbagh Educational Institute, Agra

Venture capital and

1 Venture Capital and Private Equity Industry in India

I wish to record my thanks and indebtedness to Miss Reena Ahuja, whose

Faculty of Social Sciences - Dayalbagh Educational Institute

2 Venture Capital and Private Equity Industry in India

Development of Technology especially IT and Communication

Development of Financial Markets

Development of political climate for the economy, globalization

In India, however, the potential of venture capital investments is yet to be fully

Faculty of Social Sciences - Dayalbagh Educational Institute

3 Venture Capital and Private Equity Industry in India

Faculty of Social Sciences - Dayalbagh Educational Institute

4 Venture Capital and Private Equity Industry in India

Growth of the Indian VCPE industry

Faculty of Social Sciences - Dayalbagh Educational Institute

5 Venture Capital and Private Equity Industry in India

6 Venture Capital and Private Equity Industry in India

What is Venture Capital?

7 Venture Capital and Private Equity Industry in India

generally are private partnerships or closely-held corporations funded by private and

Finance new and rapidly growing companies

Purchase equity securities

Assist in the development of new products or services

Add value to the company through active participation

Take higher risks with the expectation of higher rewards

Have a long-term orientation

When considering an investment, venture capitalists carefully screen the technical

Faculty of Social Sciences - Dayalbagh Educational Institute

8 Venture Capital and Private Equity Industry in India

9 Venture Capital and Private Equity Industry in India

Overview of current conditions

10 Venture Capital and Private Equity Industry in India

undoubtedly holds several challenges for PE firms, raising capital is unlikely to be

11 Venture Capital and Private Equity Industry in India

2) Private equity funds are used for expanding working capital.

Faculty of Social Sciences - Dayalbagh Educational Institute

12 Venture Capital and Private Equity Industry in India

customers among Invest in businesses and influence their managers to produce

short/medium term or keep them in the long run.

businesses that are not closely linked

Different types of VCPE :-

1. Early Stage Finance

Faculty of Social Sciences - Dayalbagh Educational Institute

13 Venture Capital and Private Equity Industry in India

14 Venture Capital and Private Equity Industry in India

It is an idea or concept as opposed to a business. European Venture Capital

Broadly speaking seed capital investment may take 7 to 10 years to achieve

Volume of Investment Activity

Faculty of Social Sciences - Dayalbagh Educational Institute

15 Venture Capital and Private Equity Industry in India

absence of interest in providing a significant amount of seed capital can be attributed

Establishment of company or business- The company is either being

Faculty of Social Sciences - Dayalbagh Educational Institute

16 Venture Capital and Private Equity Industry in India

Development of business plan or idea- The business plan should be fully

Faculty of Social Sciences - Dayalbagh Educational Institute

17 Venture Capital and Private Equity Industry in India

Early Stage Finance

18 Venture Capital and Private Equity Industry in India

challenge of a larger competition.

involved in high-tech business like computer, information technology etc.

Second Stage Finance

Faculty of Social Sciences - Dayalbagh Educational Institute