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This is to certify that Mr.GAURAV RAMESH DEDHIYA has worked and duly completed
his project work for a degree of Masters in Commerce under the faculty of commerce in the
subject of Accountancy and his project is entitled, " VENTURE CAPITAL" under my
supervision. I further certify that the entire work has been done by the learner under my
guidance and that no part of it has been submitted previously for any Degree or Diploma of
any University.

It is his own work and facts report by his personal findings and investigations.

Name and Signature of

Guiding Teacher

Date of Submission:
Declaration by Learner

I the undersigned MR GAURAV RAMESH DEDHIYA hereby declare that the

work embodied in this project work titled “VENTURE CAPITAL” forms my own
contribution to the research work carried out under the guidance of RAKHEE
OZHA is a result of my own research work and has not been previously submitted
previously for any degree or Diploma of any university.
Wherever reference has been made to previous works of others, it has been clearly
indicated as such and included in the bibliography.
I, hereby further declare that all information of the document has been obtained and
presented in accordance with the academic rules and ethical conduct.

To list who all have helped me is difficult because they are so numerous and the
depth is so enormous
I would like to acknowledge The Following as being Idealistic channels and fresh
Dimensions in the Completion of this Project.
I take this opportunity to thank the University of Mumbai for giving me the chance
for doing this project
I would like to thank my principal, JAYSHREE MEHTA for providing the
necessary facilities required for completion of this project.
I take this opportunity to thank the coordinators Prof. NILIMA BHAGAT for the
moral support and guidance.
I would also like to express my sincere gratitude towards my project guide
Prof. RAKHEE OZHA whose guidance and care made the project successful
I would like to thank my college library for having provided various reference books
and magazines related to my project
Lastly, I would like to thank each and every person who directly or indirectly helped
me in the completion of the project especially my parents and peers who supported
me throughout my project.



The Venture capital sector is the most vibrant industry in the financial market today.
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

Venture capital can be visualized as “your ideas and our money” concept of developing
business. Venture capitalists are people who pool financial resources from high net worth
individuals, corporate, pension funds, insurance companies, etc. To invest in high risk – high
return ventures that are unable to source funds from regular channels like banks and capital
markets. The venture capital industry in India has really taken off in. Venture capitalists not
only provide monetary resources but also help the entrepreneur with guidance in formalizing
his ideas into a viable business venture.

Venture capital (VC) is a type of private equity ,a form of financing that is provided by firms
or funds to small, early-stage, emerging firms that are deemed to have high growth potential,
or which have demonstrated high growth (in terms of number of employees, annual revenue,
or both). Venture capital firms or funds invest in these early-stage companies in exchange for
equity, or an ownership stake, in the companies they invest in. Venture capitalists take on the
risk of financing risky start-ups in the hopes that some of the firms they support will become
successful. The start-ups are usually based on an innovative technology or business model
and they are usually from the high technology industries, such as information technology
(IT), clean technology or biotechnology.

The typical venture capital investment occurs after an initial "seed funding" round. The first
round of institutional venture capital to fund growth is called the Series A round. Venture
capitalists provide this financing in the interest of generating a return through an eventual
"exit" event, such as the company selling shares to the public for the first time in an initial
public offering (IPO) or doing a merger and acquisition (also known as a "trade sale") of the
In addition to angel investing, equity crowd funding and other seed funding options,
venture capital is attractive for new companies with limited operating history that are too
small to raise capital in the public markets and have not reached the point where they are able
to secure a bank loan or complete a debt offering. In exchange for the high risk that venture
capitalists assume by investing in smaller and early-stage companies, venture capitalists
usually get significant control over company decisions, in addition to a significant portion of
the companies' ownership (and consequently value). Start-ups like Uber, Airbnb, Flipkart,
Xiaomi & Didi Chuxing are highly valued startups, where venture capitalists contribute more
than financing to these early-stage firms; they also often provide strategic advice to the firm's
executives on its business model and marketing strategies.

Venture capital is also a way in which the private and public sectors can construct an
institution that systematically creates business networks for the new firms and industries, so
that they can progress and develop. This institution helps identify promising new firms and
provide them with finance, technical expertise, mentoring, marketing "know-how", and
business models. Once integrated into the business network, these firms are more likely to
succeed, as they become "nodes" in the search networks for designing and building products
in their domain. However, venture capitalists' decisions are often biased, exhibiting for
instance overconfidence and illusion of control, much like entrepreneurial decisions in

Venture Capital is defined as providing seed, start-up and first stage finance to companies
and also funding expansion of companies that have demonstrated business potential but do
not have access to public securities market or other credit oriented funding institutions.

Venture Capital is generally provided to firms with the following characteristics:

 Newly floated companies that do not have access to sources such as equity capital
and/or other related instruments.
 Firms, manufacturing products or services that have vast growth potential.
 Firms with above average profitability.
 Novel products that are in the early stages of their life cycle.
 Projects involving above-average risk.
 Turnaround of companies

Venture Capital derives its value from the brand equity, professional image,constructive
criticism, domain knowledge, industry contacts; they bring to table at a significantly lower
management agency cost.

A Venture Capital Fund (VCF) strives to provide entrepreneurs with the support they need to
create up-scalable business with sustainable growth, while providing their contributors with

outstanding returns on investment, for the higher risks they assume.

The three primary characteristics of venture capital funds which make them eminently
suitable as a source of risk finance are:

 That it is equity or quasi equity investment

 It is long term investment and
 It is an active form of investment.
A financing diagram illustrating how start-up
companies are typically financed. First, the new firm
seeks out "seed capital" and funding from "angel
investors" and accelerators. Then, if the firm can
survive through the "valley of death"–the period where
the firm is trying to develop on a "shoestring" budget–
the firm can seek venture capital financing.

Five critical success factors have been identified for the

growth of VC in India, namely:

 The regulatory, tax and legal environment should

play an enabling role as internationally venture
funds have evolved in an atmosphere of structural
flexibility, fiscal neutrality and operational
 Resources raising, investment, management and exit should be
as simple and flexible as needed and driven by global trends.
 Venture capital should become as institutionalized industry that protects investors and
investor firms, operating in an environment suitable for raising the large amounts of
risk capital needed and for spurring innovation through start-up firms in a wide range
of high growth areas. In view of increasing global integration and mobility of capital
it is important that Indian venture capital funds as well as venture finance enterprises
are able to have global exposure and investment opportunities.
 Infrastructure in the form of incubators and R & D need to be promoted using
government support and private management as has successfully been done by
countries such as the US, Israel and Taiwan. This is necessary for faster conversion of
R&D and technological innovation into commercial products.

With technology and knowledge based ideas set to drive the global economy in the coming
millennium, and given the inherent strength by way of its human capital, technical skills, cost
competitive workforce, research and entrepreneurship, India can unleash a revolution of
wealth creation and rapid economic growth in a sustainable manner. However, for this to
happen, there is a need for risk finance and venture capital environment, which can leverage
innovation, promote technology and harness knowledge based ideas.

A venture may be defined as a project prospective converted into a process with an adequate
assumed risk and investment. With few exceptions, private equity in the first half of the 20th
century was the domain of wealthy individuals and families. The Wallenbergs, Vanderbilts,
Whitneys, Rockefellers, and Warburgs were notable investors in private companies in the
first half of the century. In 1938, Laurance S. Rockefeller helped finance the creation of both
Eastern Air Lines and Douglas Aircraft, and the Rockefeller family had vast holdings in a
variety of companies. Eric M. Warburg founded E.M. Warburg & Co. in 1938, which would
ultimately become Warburg Pincus, with investments in both leveraged buyouts and venture
capital. The Wallenberg family started Investor AB in 1916 in Sweden and were early
investors in several Swedish companies such as ABB, Atlas Copco, Ericsson, etc. in the first
half of the 20th century.

Origins of modern private equity

Before World War II (1939–1945), money orders (originally known as "development

capital") remained primarily the domain of wealthy individuals and families. Only after 1945
did "true" private equity investments begin to emerge, notably with the founding of the first
two venture capital firms in 1946: American Research and Development Corporation
(ARDC) and J.H. Whitney & Company.

Georges Doriot, the "father of venture capitalism" (and former assistant dean of Harvard
Business School), founded INSEAD in 1957. Along with Ralph Flanders and Karl Compton
(former president of MIT), Doriot founded ARDC in 1946 to encourage private-sector
investment in businesses run by soldiers returning from World War II. ARDC became the
first institutional private-equity investment firm to raise capital from sources other than
wealthy families, although it had several notable investment successes as well.ARDC is
credited[by whom? with the first trick when its 1957 investment of $70,000 in Digital
Equipment Corporation (DEC) would be valued at over $355 million after the company's
initial public offering in 1968 (representing a return of over 1200 times on its investment and
an annualized rate of return of 101%).
Former employees of ARDC went on to establish several prominent venture-capital firms
including Greylock Partners (founded in 1965 by Charlie Waite and Bill Elfers) and Morgan,
Holland Ventures, the predecessor of Flagship Ventures (founded in 1982 by James
Morgan).[10] ARDC continued investing until 1971, when Doriot retired. In 1972 Doriot
merged ARDC with Textron after having invested in over 150 companies.

John Hay Whitney (1904–1982) and his partner Benno Schmidt (1913–1999) founded J.H.
Whitney & Company in 1946. Whitney had been investing since the 1930s, founding Pioneer
Pictures in 1933 and acquiring a 15% interest in Technicolor Corporation with his cousin
Cornelius Vanderbilt Whitney. Florida Foods Corporation proved Whitney's most famous
investment. The company developed an innovative method for delivering nutrition to
American soldiers, later known as Minute Maid orange juice and was sold to The Coca-Cola
Company in 1960. J.H. Whitney & Company continued to make investments in leveraged
buyout transactions and raised $750 million for its sixth institutional private equity fund in

Early venture capital and the growth of Silicon Valley

A highway exit for Sand Hill Road in Menlo Park, California, where many Bay Area venture
capital firms are based

One of the first steps toward a professionally managed venture capital industry was the
passage of the Small Business Investment Act of 1958. The 1958 Act officially allowed the
U.S. Small Business Administration (SBA) to license private "Small Business Investment
Companies" (SBICs) to help the financing and management of the small entrepreneurial
businesses in the United States.

During the 1950s, putting a venture capital deal together may have required the help of two
or three other organizations to complete the transaction. It was a business that was growing
very rapidly, and as the business grew, the transactions grew exponentially.
During the 1960s and 1970s, venture capital firms focused their investment activity primarily
on starting and expanding companies. More often than not, these companies were exploiting
breakthroughs in electronic, medical, or data-processing technology. As a result, venture
capital came to be almost synonymous with technology finance. An early West Coast venture
capital company was Draper and Johnson Investment Company, formed in 1962 by William
Henry Draper III and Franklin P. Johnson, Jr. In 1965, Sutter Hill Ventures acquired the
portfolio of Draper and Johnson as a founding action. Bill Draper and Paul Wythes were the
founders, and Pitch Johnson formed Asset Management Company at that time.

It is commonly noted that the first venture-backed startup is Fairchild Semiconductor (which
produced the first commercially practical integrated circuit), funded in 1959 by what would
later become Venrock Associates. Venrock was founded in 1969 by Laurance S. Rockefeller,
the fourth of John D. Rockefeller's six children as a way to allow other Rockefeller children
to develop exposure to venture capital investments.

It was also in the 1960s that the common form of private equity fund, still in use today,
emerged. Private equity firms organized limited partnerships to hold investments in which the
investment professionals served as general partner and the investors, who were passive
limited partners, put up the capital. The compensation structure, still in use today, also
emerged with limited partners paying an annual management fee of 1.0–2.5% and a carried
interest typically representing up to 20% of the profits of the partnership.

The growth of the venture capital industry was fueled by the emergence of the independent
investment firms on Sand Hill Road, beginning with Kleiner, Perkins, Caufield & Byers and
Sequoia Capital in 1972. Located in Menlo Park, CA, Kleiner Perkins, Sequoia and later
venture capital firms would have access to the many semiconductor companies based in the
Santa Clara Valley as well as early computer firms using their devices and programming and
service companies.
Throughout the 1970s, a group of private equity firms, focused primarily on venture capital
investments, would be founded that would become the model for later leveraged buyout and
venture capital investment firms. In 1973, with the number of new venture capital firms
increasing, leading venture capitalists formed the National Venture Capital Association
(NVCA). The NVCA was to serve as the industry trade group for the venture capital industry.
Venture capital firms suffered a temporary downturn in 1974, when the stock market crashed
and investors were naturally wary of this new kind of investment fund.

It was not until 1978 that venture capital experienced its first major fundraising year, as the
industry raised approximately $750 million. With the passage of the Employee Retirement
Income Security Act (ERISA) in 1974, corporate pension funds were prohibited from holding
certain risky investments including many investments in privately held companies. In 1978,
the US Labor Department relaxed certain of the ERISA restrictions, under the "prudent man
rule," thus allowing corporate pension funds to invest in the asset class and providing a major
source of capital available to venture capitalists.


The public successes of the venture capital industry in the 1970s and early 1980s (e.g.,
Digital Equipment Corporation, Apple Inc., Genentech) gave rise to a major proliferation of
venture capital investment firms. From just a few dozen firms at the start of the decade, there
were over 650 firms by the end of the 1980s, each searching for the next major "home run."
The number of firms multiplied, and the capital managed by these firms increased from $3
billion to $31 billion over the course of the decade.

The growth of the industry was hampered by sharply declining returns, and certain venture
firms began posting losses for the first time. In addition to the increased competition among
firms, several other factors affected returns. The market for initial public offerings cooled in
the mid-1980s before collapsing after the stock market crash in 1987, and foreign
corporations, particularly from Japan and Korea, flooded early-stage companies with capital.
In response to the changing conditions, corporations that had sponsored in-house venture
investment arms, including General Electric and Paine Webber either sold off or closed these
venture capital units. Additionally, venture capital units within Chemical Bank and
Continental Illinois National Bank, among others, began shifting their focus from funding
early stage companies toward investments in more mature companies. Even industry founders
J.H. Whitney & Company and Warburg Pincus began to transition toward leveraged buyouts
and growth capital investments.

Venture capital boom and the Internet Bubble

By the end of the 1980s, venture capital returns were relatively low, particularly in
comparison with their emerging leveraged buyout cousins, due in part to the competition for
hot startups, excess supply of IPOs and the inexperience of many venture capital fund
managers. Growth in the venture capital industry remained limited throughout the 1980s and
the first half of the 1990s, increasing from $3 billion in 1983 to just over $4 billion more than
a decade later in 1994.

After a shakeout of venture capital managers, the more successful firms retrenched, focusing
increasingly on improving operations at their portfolio companies rather than continuously
making new investments. Results would begin to turn very attractive, successful and would
ultimately generate the venture capital boom of the 1990s. Yale School of Management
Professor Andrew Metrick refers to these first 15 years of the modern venture capital industry
beginning in 1980 as the "pre-boom period" in anticipation of the boom that would begin in
1995 and last through the bursting of the Internet bubble in 2000.

The late 1990s were a boom time for venture capital, as firms on Sand Hill Road in Menlo
Park and Silicon Valley benefited from a huge surge of interest in the nascent Internet and
other computer technologies. Initial public offerings of stock for technology and other growth
companies were in abundance, and venture firms were reaping large returns.
Private equity crash

The technology-heavy NASDAQ Composite index peaked at 5,048 in March 2000 reflecting
the high point of the dot-com bubble.

The Nasdaq crash and technology slump that started in March 2000 shook virtually the entire
venture capital industry as valuations for startup technology companies collapsed. Over the
next two years, many venture firms had been forced to write-off large proportions of their
investments, and many funds were significant "under water" (the values of the fund's
investments were below the amount of capital invested). Venture capital investors sought to
reduce the size of commitments they had made to venture capital funds, and, in numerous
instances, investors sought to unload existing commitments for cents on the dollar in the
secondary market. By mid-2003, the venture capital industry had shriveled to about half its
2001 capacity. Nevertheless, PricewaterhouseCoopers' MoneyTree Survey shows that total
venture capital investments held steady at 2003 levels through the second quarter of 2005.

Although the post-boom years represent just a small fraction of the peak levels of
venture investment reached in 2000, they still represent an increase over the levels of
investment from 1980 through 1995. As a percentage of GDP, venture investment was
0.058% in 1994, peaked at 1.087% (nearly 19 times the 1994 level) in 2000 and ranged from
0.164% to 0.182% in 2003 and 2004. The revival of an Internet-driven environment in 2004
through 2007 helped to revive the venture capital environment. However, as a percentage of
the overall private equity market, venture capital has still not reached its mid-1990s level, let
alone its peak in 2000.

The Indian venture capital industry, at the present, is at crossroads. Following are the major
issues faced by this industry.

1. Limitation on structuring of Venture Capital Funds (VCFs): VCFs in India are

structured in the form of a company or trust fund and are required to follow a three-tier
mechanism-investors, trustee company and AMC. A proper tax-efficient vehicle in the form
of ‘Limited Liability Partnership Act’, which is popular in USA, is not made applicable for
structuring of VCFs in India. In this form of structuring, investors’ liability towards the fund
is limited to the extent of his contribution in the fund and also formalities in structuring of
fund are simpler.

2. Problem in raising of funds: In USA primary sources of funds are insurance companies,
pensions funds, corporate bodies etc; while in Indian domestic financial institutions,
multilateral agencies and state government undertakings are the main sources of funds for
VCFs. Allowing Pension funds, Insurance companies to invest in the VCFs would enlarge the
possibility of setting up of domestic VCFs. Further, if Mutual Funds are allowed to invest
upto 5 percent of their corpus in VCFs by SEBI, it may lead to increased availability of fund
for VCFs.

3. Lack of Inventive to Investors: Presently, high net worth individuals and corporate are
not provided with any investments in VCFs. The problem of raising funds from these sources
further gets aggravated with the differential tax treatment applicable to VCFs and mutual
funds. While the income of the Mutual funds is totally tax exempted under Section 10(23D)
of the Income Tax Act income of domestic VCFs, which provide assistance to small, and
medium enterprise is not totally exempted from tax. In absence of any inventive, it is
extremely difficult for domestic VCFs to raise money from this investor group that has a
good potential.

4. Absence of ‘angel investors’: In Silicon Valley, which is a nurturing ground for venture
funds financed IT companies; initial/ seed stage financing is provided by the angel investors
till the company becomes eligible for venture funding . There after Venture Capitalist through
financial support and value-added inputs enables the company to achieve better growth rate
and facilitate its listng on stock exchanges. Private equity investors typically invest at
expansion/ later stages of growth of the company with large investments. In contrast to this
phenomenon, Indian industry is marked by an absence of angel


5. Limitations of investment instruments: As per the section 10(23FA) of the Income Tax
Act, income from investments only in equity instruments of venture capital undertakings is
eligible for tax exemption; whereas SEBI regulations allow investments in the form of equity
shares or equity related securities issued by company whose shares are not listed on stock
exchange. As VCFs normally structure the investments in venture capital undertakings by
way of equity and convertible instruments such as Optionally/ Fully Convertible Debentures,
Redeemable Preference shares etc., they need tax breaks on the income from equity linked

6. Domestic VCFs vis-à- vis Offshore Funds: The domestic VCFs operations in the country
are governed by the regulations as prescribed by SEBI and investment restrictions as placed
by CBDT for availing of the tax benefits.They pay maximum marginal tax 35 percent in
respect of non-exempt income such as interest through Debentures etc., while off- shore
funds which are structured in tax havens such as Mauritius are able to overcome the
investment restriction of SEBI and also get exemption from Income Tax under Tax
Avoidance Treaties. This denies a level playing field for the domestic investors for carrying
out the similar activity in the country.

7. Limitation on industry segments: In sharp contrast to other countries where telecom,

services and software bag the largest share of venture capital investments, in India other
conventional sectors dominate venture finance.Opening up of restrictions, in recent time, on
investing in the services sectors such as telecommunication and related services, project
consultancy, design and testing services, tourism etc, would increase the domain and growth
possibilities of venture capital.
8. Anomaly between SEBI regulations and CBDT rules: CBDT tax rules recognize
investment in financially weak companies only in case of unlisted companies as venture
investment whereas SEBI regulations recognize investment in financially weak companies,
which offers an attractive opportunity to VCFs. The same may be allowed by CBDT for
availing of tax exemption on capital gains at a later stage. Also SEBI regulations do not
restrict size of an investment in a company. However, as per Income tax rules, maximum
investment in a company is restricted to less than 20 per cent of the raised corpus of VCF and
paid up share capital in case of Venture Capital Company. Further, investment in company is
also restricted upto 40 per cent of equity of Investee Company. VCFs may place the
investment restriction for VCFs by way of maximum equity stake in the company, which
could be upto 49 per cent of equity of the Investee Company.

9. Limitations on Exit Mechanism: The VCFs , which have invested in variousventures,

have not been able to exit from their investments due to limited exitroutes and also due to
unsatisfactory performance of OTCEI . The threshold limit placed by various stock
exchanges acts as deterrent for listing of companies with smaller equity base. SEBI can
consider lowering of threshold limit for public/listing for companies backed by VCFs. Buy-
back of equity shares by the company has been permitted for unlisted companies, which
would provide exit route to investment of venture capitalists.
Features of Venture Capital

“Venture capital combines the qualities of a

banker, stock market investor and entrepreneur in one.”

The main features of venture capital can be summarised

as follows:

i. High Degrees of Risk Venture capital represents

financial investment in a highly risky project with the
objective of earning a high rate of return.

ii. Equity Participation Venture capital financing. is,

invariably, an actual or potential equity participation
wherein the objective of venture capitalist is to make
capital gain by selling the shares once the firm becomes
profitable. .

iii. Long Term Investment Venture capital financing is

a long term investment. It generally takes a long period
to encash the investment in securities made by the
venture capitalists.
iv. Participation in Management In addition to
providing capital, venture capital funds take an active
interest in the management of the assisted firms. Thus,
the approach of venture capital firms is different from
that of a traditional lender or banker. It is also different
from that of a ordinary stock market investor who
merely trades in the shares of a company without
participating in their management. It has been rightly
said, “venture capital combines the qualities of banker,
stock market investor and entrepreneur in one”.

v. Achieve Social Objectives It is different from the development

capital provided by several central and state level government bodies in that the profit
objective is the motive behind the financing. But venture capital projects generate
employment, and balanced regional growth indirectly due to setting up of successful new

vi..Investment is liquid A venture capital is not subject to repayment on demand as with an

overdraft or following a loan repayment schedule. The investment is realised only when the
company is sold or achieves a stock market listing. It is lost when the company goes into

vii.Nature of firms: Venture Capitalists usually finance small and medium-sized firms during
the early stages of their development, until they are established and are able to raise finance
from the conventional industrial finance market. Many of these firms are new, high
technology-oriented companies.
viii..Liquidity: Liquidity of Venture Capital investment depends on the success or otherwise
of the new venture or product. Accordingly, there will be higher liquidity where the new
ventures are highly successful.
Research Objectives

To answer the research questions as highlighted in the table above, following specific
research objectives have been set for the study.

1. To study the the evolution and growth of venture capital industry at international (US,
Europe and Asia-Pacific), national (India) and regional level (Gujarat).

2. To investigate in detail the decision determinants of Indian venture capitalists in relation to

pre-investment strategies, post-investment activities, monitoring and controlling of the
investee, investor-investee relationship, syndication, geographical preference for investment
and the divestment of the VCs from the business of the investee.

3. To investigate the structure and functioning of VC firms and their invested companies.

4. To examine the role played by the venture capitalists in the gwoth of the ventures funded
by them in Gujarat (Specifically of GVFL).

5. To find out the funding preferences of young entrepreneurs from Gujarat.

6. To make suggestions for the further development of the venture capital industry at national
level (India) and regional level (Gujarat).

Scope of the Study

For studying the venture capital investment process, venture capital firms operating across
different cities in India such as Bangalore, Mumbai, Chennai, Pune, Delhi etc., have been
considered. Foreign VC/PE firms investing in India were also approached through their
offices located in India. For studying the role played by the venture capitalists in the
development of the ventures, responses were collected from the companies that had raised
VC funding in Gujarat. For this study, the ventures from which the VC had already made an
exit were also included in order to have a larger set of responses for meaningful analysis. For
studying the funding preferences of young entrepreneurs, again the responses were collected
from the firms located in Gujarat. Care has been taken to include only knowledge based and
innovative entrepreneurial ventures.
For the purpose of the study, entrepreneurial ventures are defined as those ventures that
business might exhibit, high risk and have growth and profitability as their main goals.

The innovation may be in the product or service itself, or in the business processes used to
deliver it. Demand side studies were restricted to geographic region of Gujarat due to
convenience, access available and willingness to share the information on the part of investee

Data Sources and Research Approach

It is well established that while the secondary data provides good conceptual clarity and
direction to begin with, primary data based on empirical study often helps the researcher get
insightful inferences about the subject of interest. Hence, for the purpose of gaining
maximum possible knowledge related to the study, both the data sources have been duly and
optimally used.

Primary Data

Primary data from venture capitalists across India and entrepreneurs from Gujarat was
collected using the survey approach through structured questionnaires. These surveys covered
various issues to meet the objectives of the study. A survey questionnaire was developed
building upon the insights obtained through structured interview with Gujarat Venture
Finance Limited (GVFL) and various other venture capitalists and academicians approached
at VC-PE meet organized at IIM-A during February, 2009. Questionnaires were prepared in
English considering the profiling of the respondents on demand (knowledge entreprenrus)
and supply side (venture capitalists) of the studies.
Secondary Data

For studying the evolution and growth of venture capital industry at international (US,
Europe and Asia-Pacific), national (India) and regional (Gujarat) level, secondary data was
considered. The literature studies related to venture capital and private equity, articles,
journals, books, previous students’ projects at IIM-A, other published and unpublished
sources, internet web pages and electronic database like ebsco were used as secondary
sources. Various libraries, particularly of IIM-A, were accessed to collect the information.
Reports with respect to industry statistics available free on the website of IVCA and Venture
Intelligence were used for supporting the industry statistics.

Obtaining venture capital is substantially different from raising debt or a loan.

Lenders have a legal right to interest on a loan and repayment of the capital irrespective of
the success or failure of a business. Venture capital is invested in exchange for an equity
stake in the business. The return of the venture capitalist as a shareholder depends on the
growth and profitability of the business. This return is generally earned when the venture
capitalist "exits" by selling its shareholdings when the business is sold to another owner.

Modes of Finance by Venture Capitalists Venture capitalists provide funds for long-
term in any of the following modes

1. Equity - Most of the venture capital funds provide financial support to entrepreneurs in the
form of equity by financing 49% of the total equity. This is to ensure that the ownership and
overall control remains with the entrepreneur. Since there is a great uncertainty about the
generation of cash inflows in the initial years, equity financing is the safest mode of
financing. A debt instrument on the other hand requires periodical servicing of debt.

2. Conditional loan - From a venture capitalist~ point of view, equity is an unsecured

instrument and hence a less preferable option than a secured debt instrument. A conditional
loan usually involves either no interest at all or a coupon payment at nominal rate. In
addition, a royalty at agreed rates is payable to the lender on the sales turnover. As the units
picks up in sales levels, the interest rate are increased and royalty amounts are decreased.

3. Convertible loans - The convertible loan is subordinate to all other loans, which may be
converted into equity if interest payments are not made within agreed time limit.

4.Areas of Investment :Different venture groups prefer different types of investments. Some
specialize in seed capital and early expansion while others focus on exit financing.
Biotechnology, medical services, communications, electronic components and software
companies seem to be attracting the most attention from venture firms and receiving the most
financing. Venture capital firms finance both early and later stage investments to maintain a
balance between risk and profitability. In India, software sector has been attracting a lot of
venture finance. Besides media, health and pharmaceuticals, agribusiness and retailing are the
other areas that are favored by a lot of venture companies.
Venture capitalists are typically very selective in deciding what to invest in; as a
result, firms are looking for the extremely rare yet sought-after qualities such as innovative
technology, potential for rapid growth, a well-developed business model, and an impressive
management team. Of these qualities, funds are most interested in ventures with
exceptionally high growth potential, as only such opportunities are likely capable of
providing financial returns and a successful exit within the required time frame (typically 3–7
years) that venture capitalists expect.

Because investments are illiquid and require the extended time frame to harvest, venture
capitalists are expected to carry out detailed due diligence prior to investment. Venture
capitalists also are expected to nurture the companies in which they invest, in order to
increase the likelihood of reaching an IPO stage when valuations are favourable. Venture
capitalists typically assist at four stages in the company's development

Idea generation;


Ramp up and


Because there are no public exchanges listing their securities, private companies meet venture
capital firms and other private equity investors in several ways, including warm referrals
from the investors' trusted sources and other business contacts investor conferences and
symposia; and summits where companies pitch directly to investor groups in face-to-face
meetings, including a variant known as "Speed Venturing", which is akin to speed-dating for
capital, where the investor decides within 10 minutes whether he wants a follow-up meeting.
In addition, some new private online networks are emerging to provide additional
opportunities for meeting investors.
This need for high returns makes venture funding an expensive capital source for companies,
and most suitable for businesses having large up-front capital requirements, which cannot be
financed by cheaper alternatives such as debt. That is most commonly the case for intangible
assets such as software, and other intellectual property, whose value is unproven. In turn, this
explains why venture capital is most prevalent in the fast-growing technology and life
sciences or biotechnology fields.

If a company does have the qualities venture capitalists seek including a solid business plan, a
good management team, investment and passion from the founders, a good potential to exit
the investment before the end of their funding cycle, and target minimum returns in excess of
40% per year, it will find it easier to raise venture capital.
Financing stages

“Venture capital firms finance both early and later stage investments to maintain a balance
between risk and profitability.” Venture capital firms usually recognise the following two
main stages when the investment could be made in a venture namely:

A. Early Stage Financing

i. Seed Capital & Research and Development Projects.

ii. Start Ups

iii. Second Round Finance

B. Later Stage Financing

i. Development Capital

ii. Expansion Finance

iii. Replacement Capital

iv. Turn Arounds

v. Buy Outs

A. Early Stage Financing :This stage includes the following:

I. Seed Capital and R & D Projects: Venture capitalists are more often interested in
providing seed finance i. e. making provision of very small amounts for finance needed to
turn into a business. Research and development activities are required to be undertaken
before a product is to be launched. External finance is often required by the entrepreneur
during the development of the product. The financial risk increases progressively as the
research phase moves into the development phase, where a sample of the product is tested
before it is finally commercialised “venture capitalists/ firms/ funds are always ready to
undertake risks and make investments in such R & D projects promising higher returns in

II. Start Ups: The most risky aspect of venture capital is the launch of a new business after
the Research and development activities are over. At this stage, the entrepreneur and his
products or services are as yet untried. The finance required usually falls short of his own
resources. Start-ups may include new industries / businesses set up by the experienced
persons in the area in which they have knowledge. Others may result from the research
bodies or large corporations, where a venture capitalist joins with an industrially experienced
or corporate partner. Still other start-ups occur when a new company with inadequate
financial resources to commercialise new technology is promoted by an existing company.

III. Second Round Financing: It refers to the stage when product has already been launched
in the market but has not earned enough profits to attract new investors. Additional funds are
needed at this stage to meet the growing needs of business. Venture Capital Institutions
(VCIs) provide larger funds at this stage than at other early stage financing in the form of
debt. The time scale of investment is usually three to seven years.

B. Later Stage Financing: Those established businesses which require additional financial
support but cannot raise capital through public issue approach venture capital funds for
financing expansion, buyouts and turnarounds or for development capital.

I. Development Capital: It refers to the financing of an enterprise which has overcome the
highly risky stage and have recorded profits but cannot go public, thus needs financial
support. Funds are needed for the purchase of new equipment/ plant, expansion of marketing
and distributing facilities, launching of product into new regions and so on. The time scale of
investment is usually one to three years and falls in medium risk category.

II. Expansion Finance: Venture capitalists perceive low risk in ventures requiring finance
for expansion purposes either by growth implying bigger factory, large warehouse, new
factories, new products or new markets or through purchase of exiting businesses. The time
frame of investment is usually from one to three years. It represents the last round of
financing before a planned exit.
III. Buy Outs: It refers to the transfer of management control by creating a separate business
by separating it from their existing owners. It may be of two types.

i. Management Buyouts (MBOs): In Management Buyouts (MBOs) venture capital

institutions provide funds to enable the current operating management/ investors to
acquire an existing product line/business. They represent an important part of the
activity of VCIs.
ii. Management Buyins (MBIs): Management Buy-ins are funds provided to enable an
outside group of manager(s) to buy an existing company. It involves three parties: a
management team, a target company and an investor (i.e. Venture capital institution).
MBIs are more risky than MBOs and hence are less popular because it is difficult for
new management to assess the actual potential of the target company. Usually, MBIs
are able to target the weaker or under-performing companies.

IV. Replacement Capital- VC Is another aspect of financing is to provide funds for the
purchase of existing shares of owners. This may be due to a variety of reasons including
personal need of finance, conflict in the family, or need for association of a well known
name. The time scale of investment is one to three years and involve low risk.

V. Turnarounds-Such form of venture capital financing involves medium to high risk and a
time scale of three to five years. It involves buying the control of a sick company which
requires very specialised skills. It may require rescheduling of all the company’s borrowings,
change in management or even a change in ownership. A very active “hands on” approach is
required in the initial crisis period where the venture capitalists may appoint its own
chairman or nominate its directors on the board.

In nutshell, venture capital firms finance both early and later stage investments to maintain a
balance between risk and profitability. Venture capitalists evaluate technology and study
potential markets besides considering the capability of the promoter to implement the project
while undertaking early stage investments. In later stage investments, new markets and track
record of the business/entrepreneur is closely examined.
Difference between a Venture Capitalist and Bankers/Money Managers.

 Banker is a manager of other people’s money while the venture capitalist

is basically an investor.
 Venture capitalist generally invests in new ventures started by
technocrats who generally are in need of entrepreneurial aid and funds.
 Venture capitalists generally invest in companies that are not listed on
any stock exchanges. They make profits only after the company obtains
 The most important difference between a venture capitalist and
conventional investors and mutual funds is that he is a specialist and
lends management support and also
 Financial and strategic planning
 Recruitment of key personnel
 Obtain bank and debt financing
 Access to international markets and technology
 Introduction to strategic partners and acquisition targets in the
 Regional expansion of manufacturing and marketing operations
 Obtain a public listing

Venture capital firms are typically structured as partnerships, the general partners of
which serve as the managers of the firm and will serve as investment advisors to the venture
capital funds raised. Venture capital firms in the United States may also be structured as
limited liability companies, in which case the firm's managers are known as managing
members. Investors in venture capital funds are known as limited partners. This constituency
comprises both high-net-worth individuals and institutions with large amounts of available
capital, such as state and private pension funds, university financial endowments,
foundations, insurance companies, and pooled investment vehicles, called funds of funds.

Most Venture Capital funds have a fixed life of 10 years, with the possibility of a few
years of extensions to allow for private companies still seeking liquidity. The
investing cycle for most funds is generally three to five years, after which the focus is
managing and making follow-on investments in an existing portfolio. This model was
pioneered by successful funds in Silicon Valley through the 1980s to invest in
technological trends broadly but only during their period of ascendance, and to cut
exposure to management and marketing risks of any individual firm or its product. In
such a fund, the investors have a fixed commitment to the fund that is initially
unfunded and subsequently "called down" by the Venture Capital fund over time as
the fund makes its investments. There are substantial penalties for a limited partner
(or investor) which fails to participate in a capital call. Normally can take anywhere
from a month or so to several years for Venture Capitalists to raise money from
limited partners for their fund. At the time when all of the money has been raised, the
fund is said to be closed, and the 10-year lifetime begins. Some funds have partial
closure when one half (or some other amount) of the fund has been raised. "Vintage
year" generally refers to the year in which the fund was closed and may serve as a
means to stratify VC funds for comparison. This shows the difference between a
Venture Capital fund management company and the Venture Capital funds managed
by them. From investors point of view funds can be traditional where all the investors
invest with equal terms or asymmetric where different investors have different terms.
Typically the asymmetry is seen in cases where there's an investor that has other
interests such as tax income in case of public investors.

Venture Capitalist firms differ in their approaches. There are multiple factors,
and each firm is different. Some of the factors that influence VC decisions include:
Some VCs tend to invest in new ideas, or knowledge based companies. Others prefer
investing in established companies that need support to go public or grow. Some
invest solely in certain industries. Some prefer operating locally while others will
operate nationwide or even globally. 18 VC expectations often vary. Some may want
a quicker public sale of the company or expect fast growth. The amount of help a VC
provides can vary from one firm to the next.

Venture capitalist firms differ in their motivations and approaches. There are multiple
factors, and each firm is different.

Some of the factors that influence VC decisions include:

 Business situation: Some VCs tend to invest in new, disruptive ideas, or fledgling
companies. Others prefer investing in established companies that need support to go
public or grow.
 Some invest solely in certain industries.
 Some prefer operating locally while others will operate nationwide or even globally.
 VC expectations can often vary. Some may want a quicker public sale of the company or
expect fast growth. The amount of help a VC provides can vary from one firm to the

 Within the venture capital industry, the general partners and other investment
professionals of the venture capital firm are often referred to as "venture capitalists"
or "VCs". Typical career backgrounds vary, but, broadly speaking, venture capitalists
come from either an operational or a finance background. Venture capitalists with an
operational background (operating partner) tend to be former founders or executives
of companies similar to those which the partnership finances or will have served as
management consultants. Venture capitalists with finance backgrounds tend to
have investment banking or other corporate finance experience.
 Although the titles are not entirely uniform from firm to firm, other positions at
venture capital firms include:
Position Role

They run the Venture Capital firm and make the investment decisions on
behalf of the fund. GPs typically put in personal capital up to 1-2% of
Partners or GPs
the VC Fund size to show their commitment to the LPs.

Venture partners are expected to source potential investment

opportunities ("bring in deals") and typically are compensated only for
those deals with which they are involved.

This is a mid-level investment professional position, and often

considered a "partner-track" position. Principals will have been promoted
Principal from a senior associate position or who have commensurate experience
in another field, such as investment banking, management consulting, or
a market of particular interest to the strategy of the venture capital firm.

This is typically the most junior apprentice position within a venture

capital firm. After a few successful years, an associate may move up to
Associate the "senior associate" position and potentially principal and beyond.
Associates will often have worked for 1–2 years in another field, such
as investment banking or management consulting.

Entrepreneurs-in-residence (EIRs) are experts in a particular industry

sector (e.g., biotechnology or social media) and perform due diligence on
potential deals. EIRs are hired by venture capital firms temporarily (six
to 18 months) and are expected to develop and pitch startup ideas to their
host firm, although neither party is bound to work with each other.
Structure of the funds
Most venture capital funds have a fixed life of 10 years, with the possibility of a few
years of extensions to allow for private companies still seeking liquidity. The investing cycle
for most funds is generally three to five years, after which the focus is managing and making
follow-on investments in an existing portfolio. This model was pioneered by successful funds
in Silicon Valley through the 1980s to invest in technological trends broadly but only during
their period of ascendance, and to cut exposure to management and marketing risks of any
individual firm or its product.

In such a fund, the investors have a fixed commitment to the fund that is initially unfunded
and subsequently "called down" by the venture capital fund over time as the fund makes its
investments. There are substantial penalties for a limited partner (or investor) that fails to
participate in a capital call.

It can take anywhere from a month or so to several years for venture capitalists to raise
money from limited partners for their fund. At the time when all of the money has been
raised, the fund is said to be closed, and the 10-year lifetime begins. Some funds have partial
closes when one half (or some other amount) of the fund has been raised. The vintage year
generally refers to the year in which the fund was closed and may serve as a means to stratify
VC funds for comparison. This[30] shows the difference between a venture capital fund
management company and the venture capital funds managed by them.

From investors' point of view, funds can be:

(1) traditional—where all the investors invest with equal terms; or

(2) asymmetric—where different investors have different terms. Typically the asymmetry is
seen in cases where there's an investor that has other interests such as tax income in case of
public investors.

Venture capitalists are compensated through a combination of management fees and carried
interest (often referred to as a "two and 20" arrangement):

Payment Implementation

an annual payment made by the investors in the fund to the fund's manager to
Management pay for the private equity firm's investment operations.[32] In a typical venture
fees capital fund, the general partners receive an annual management fee equal to
up to 2% of the committed capital.

a share of the profits of the fund (typically 20%), paid to the private equity
fund's management company as a performance incentive. The remaining 80%
Carried of the profits are paid to the fund's investors[32] Strong limited partner interest
interest in top-tier venture firms has led to a general trend toward terms more
favorable to the venture partnership, and certain groups are able to command
carried interest of 25–30% on their funds.

Because a fund may run out of capital prior to the end of its life, larger venture capital firms
usually have several overlapping funds at the same time; doing so lets the larger firm keep
specialists in all stages of the development of firms almost constantly engaged. Smaller firms
tend to thrive or fail with their initial industry contacts; by the time the fund cashes out, an
entirely new generation of technologies and people is ascending, whom the general partners
may not know well, and so it is prudent to reassess and shift industries or personnel rather
than attempt to simply invest more in the industry or people the partners already know.

Because of the strict requirements venture capitalists have for potential investments,
many entrepreneurs seek seed funding from angel investors, who may be more willing to
invest in highly speculative opportunities, or may have a prior relationship with the

Furthermore, many venture capital firms will only seriously evaluate an investment in
a start-up company otherwise unknown to them if the company can prove at least some of its
claims about the technology and/or market potential for its product or services. To achieve
this, or even just to avoid the dilutive effects of receiving funding before such claims are
proven, many start-ups seek to self-finance sweat equity until they reach a point where they
can credibly approach outside capital providers such as venture capitalists or angel investors.
This practice is called "bootstrapping".

Equity crowd funding is emerging as an alternative to traditional venture capital.

Traditional crowd funding is an approach to raising the capital required for a new project or
enterprise by appealing to large numbers of ordinary people for small donations. While such
an approach has long precedents in the sphere of charity, it is receiving renewed attention
from entrepreneurs, now that social media and online communities make it possible to reach
out to a group of potentially interested supporters at very low cost.

Some equity crowd funding models are also being applied specifically for startup
funding, such as those listed at Comparison of crowd funding services. One of the reasons to
look for alternatives to venture capital is the problem of the traditional VC model. The
traditional VCs are shifting their focus to later-stage investments, and return on investment of
many VC funds have been low or negative.

In Europe and India, Media for equity is a partial alternative to venture capital
funding. Media for equity investors are able to supply start-ups with often significant
advertising campaigns in return for equity. In Europe, an investment advisory firm offers
young ventures the option to exchange equity for services investment; their aim is to guide
ventures through the development stage to arrive at a significant funding, mergers and
acquisition, or other exit strategy.
In industries where assets can be securitized effectively because they reliably generate
future revenue streams or have a good potential for resale in case of foreclosure, businesses
may more cheaply be able to raise debt to finance their growth. Good examples would
include asset-intensive extractive industries such as mining, or manufacturing industries.
Offshore funding is provided via specialist venture capital trusts, which seek to use
securitization in structuring hybrid multi-market transactions via an SPV (special purpose
vehicle): a corporate entity that is designed solely for the purpose of the financing.

In addition to traditional venture capital and angel networks, groups have emerged,
which allow groups of small investors or entrepreneurs themselves to compete in a privatized
business plan competition where the group itself serves as the investor through a democratic

Law firms are also increasingly acting as an intermediary between clients seeking
venture capital and the firms providing it.

Other forms include venture resources that seek to provide non-monetary support to
launch a new venture.
Societal impact

Venture capital is also associated with job creation (accounting for 2% of US

GDP),[37] the knowledge economy, and used as a proxy measure of innovation within an
economic sector or geography. Every year, there are nearly 2 million businesses created in
the USA, and 600–800 get venture capital funding. According to the National Venture
Capital Association, 11% of private sector jobs come from venture-backed companies and
venture-backed revenue accounts for 21% of US GDP.

Babson College's Diana Report found that the number of women partners in VC firms
decreased from 10% in 1999 to 6% in 2014. The report also found that 97% of VC-funded
businesses had male chief executives, and that businesses with all-male teams were more than
four times as likely to receive VC funding compared to teams with at least one woman. More
than 75% of VC firms in the US did not have any female venture capitalists at the time they
were surveyed. It was found that a greater fraction of VC firms had never had a woman
represent them on the board of one of their portfolio companies. For comparison, a UC Davis
study focusing on large public companies in California found 49.5% with at least one female
board seat.When the latter results were published, some San Jose Mercury News readers
dismissed the possibility that sexism was a cause. In a follow-up Newsweek article, Nina
Burleigh asked "Where were all these offended people when women like Heidi Roizen
published accounts of having a venture capitalist stick her hand in his pants under a table
while a deal was being discussed?"
Geographical differences

Venture capital, as an industry, originated in the United States, and American firms
have traditionally been the largest participants in venture deals with the bulk of venture
capital being deployed in American companies. However, increasingly, non-US venture
investment is growing, and the number and size of non-US venture capitalists have been

Venture capital has been used as a tool for economic development in a variety of developing
regions. In many of these regions, with less developed financial sectors, venture capital plays
a role in facilitating access to finance for small and medium enterprises (SMEs), which in
most cases would not qualify for receiving bank loans.

In the year of 2008, while VC funding were still majorly dominated by U.S. money ($28.8
billion invested in over 2550 deals in 2008), compared to international fund investments
($13.4 illion invested elsewhere), there has been an average 5% growth in the venture capital
deals outside the USA, mainly in China and Europe. Geographical differences can be
significant. For instance, in the UK, 4% of British investment goes to venture capital,
compared to about 33% in the U.S.

United States

Quarterly U.S. Venture Capital Investments 1995-2017

Venture capital investment by area

Venture capitalists invested some $29.1 billion in 3,752 deals in the U.S. through the fourth
quarter of 2011, according to a report by the National Venture Capital Association. The same
numbers for all of 2010 were $23.4 billion in 3,496 deals.

According to a report by Dow Jones VentureSource, venture capital funding fell to $6.4
billion in the USA in the first quarter of 2013, an 11.8% drop from the first quarter of 2012,
and a 20.8% decline from 2011. Venture firms have added $4.2 billion into their funds this
year, down from $6.3 billion in the first quarter of 2013, but up from $2.6 billion in the fourth
quarter of 2012.


The Venture Capital industry in Mexico is a fast-growing sector in the country that, with the
support of institutions and private funds, is estimated to reach US$100 billion invested by


In Israel, high-tech entrepreneurship and venture capital have flourished well beyond the
country's relative size. As it has very little natural resources and, historically has been forced
to build its economy on knowledge-based industries, its VC industry has rapidly developed,
and nowadays has about 70 active venture capital funds, of which 14 international VCs with
Israeli offices, and additional 220 international funds which actively invest in Israel. In
addition, as of 2010, Israel led the world in venture capital invested per capita. Israel attracted
$170 per person compared to $75 in the USA.[49] About two thirds of the funds invested
were from foreign sources, and the rest domestic. In 2013, Wix.com joined 62 other Israeli
firms on the Nasdaq.[50] Read more about Venture capital in Israel.


Canadian technology companies have attracted interest from the global venture capital
community partially as a result of generous tax incentive through the Scientific Research and
Experimental Development (SR&ED) investment tax credit program.[citation needed] The
basic incentive available to any Canadian corporation performing R&D is a refundable tax
credit that is equal to 20% of "qualifying" R&D expenditures (labour, material, R&D
contracts, and R&D equipment). An enhanced 35% refundable tax credit of available to
certain (i.e. small) Canadian-controlled private corporations (CCPCs). Because the CCPC
rules require a minimum of 50% Canadian ownership in the company performing R&D,
foreign investors who would like to benefit from the larger 35% tax credit must accept
minority position in the company, which might not be desirable. The SR&ED program does
not restrict the export of any technology or intellectual property that may have been
developed with the benefit of SR&ED tax incentives.

Canada also has a fairly unusual form of venture capital generation in its Labour Sponsored
Venture Capital Corporations (LSVCC). These funds, also known as Retail Venture Capital
or Labour Sponsored Investment Funds (LSIF), are generally sponsored by labor unions and
offer tax breaks from government to encourage retail investors to purchase the funds.
Generally, these Retail Venture Capital funds only invest in companies where the majority of
employees are in Canada. However, innovative structures have been developed to permit
LSVCCs to direct in Canadian subsidiaries of corporations incorporated in jurisdictions
outside of Canada.


Many Swiss start-ups are university spin-offs, in particular from its federal institutes of
technology in Lausanne and Zurich. According to a study by the London School of
Economics analysing 130 ETH Zurich spin-offs over 10 years, about 90% of these start-ups
survived the first five critical years, resulting in an average annual IRR of more than 43%.
Switzerland's most active early-stage investors are The Zurich Cantonal Bank, investiere.ch,
Swiss Founders Fund, as well as a number of angel investor clubs.


Europe has a large and growing number of active venture firms. Capital raised in the region
in 2005, including buy-out funds, exceeded €60 billion, of which €12.6 billion was
specifically allocated to venture investment. Trade association Invest Europe has a list of
active member firms and industry statistics.

European venture capital investments in 2015 increased by 5% year-on-year to €3.8 billion,

with 2,836 companies backed. The amount invested increased across all stages led by seed
investments with an increase of 18%. Most capital was concentrated in life sciences (34%),
computer & consumer electronics (20%) and communications (19%) sectors, according to
Invest Europe's annual data.

In 2012, in France, according to a study by AFIC (the French Association of VC firms),

€6.1B have been invested through 1,548 deals (39% in new companies, 61% in new rounds)
by firms such as Partech Ventures or Innovacom.

A study published in early 2013 showed that contrary to popular belief, European startups
backed by venture capital do not perform worse than US counterparts.[57] European venture-
backed firms have an equal chance of listing on the stock exchange, and a slightly lower
chance of a "trade sale" (acquisition by other company).

Leading early-stage venture capital investors in Europe include Mark Tluszcz of Mangrove
Capital Partners and Danny Rimer of Index Ventures, both of whom were named on Forbes
Magazine's Midas List of the world's top dealmakers in technology venture capital in 2007.


India is fast catching up with the West in the field of venture capital and a number of
venture capital funds have a presence in the country (IVCA). In 2006, the total amount of
private equity and venture capital in India reached $7.5 billion across 299 deals. In the Indian
context, venture capital consists of investing in equity, quasi-equity, or conditional loans in
order to promote unlisted, high-risk, or high-tech firms driven by technically or
professionally qualified entrepreneurs. It is also used to refer to investors "providing seed",
"start-up and first-stage financing", or financing companies that have demonstrated
extraordinary business potential. Venture capital refers to capital investment; equity and debt
;both of which carry indubitable risk. The risk anticipated is very high. The venture capital
industry follows the concept of "high risk, high return", innovative entrepreneurship,
knowledge-based ideas and human capital intensive enterprises have taken the front seat as
venture capitalists invest in risky finance to encourage innovation.
China is also starting to develop a venture capital industry (CVCA).

Vietnam is experiencing its first foreign venture capitals, including IDG Venture Vietnam
($100 million) and DFJ Vinacapital ($35 million)

Singapore is widely recognized and featured as one of the hottest places to both start up and
invest, mainly due to its healthy ecosystem, its strategic location and connectedness to
foreign markets. With 100 deals valued at US$3.5 billion, Singapore saw a record value of
PE and VC investments in 2016. The number of PE and VC investments increased
substantially over the last 5 years: In 2015, Singapore recorded 81 investments with an
aggregate value of US$2.2 billion while in 2014 and 2013, PE and VC deal values came to
US$2.4 billion and US$0.9 billion respectively. With 53 percent, tech investments account
for the majority of deal volume. Moreover, Singapore is home to two of South-East Asia's
largest unicorns. Garena is reportedly the highest-valued unicorn in the region with a US$3.5
billion price tag, while Grab is the highest-funded, having raised a total of US$1.43 billion
since its incorporation in 2012. Start-ups and small businesses in Singapore receive support
from policy makers and the local government fosters the role VCs play to support
entrepreneurship in Singapore and the region.

For instance, in 2016, Singapore’s National Research Foundation (NRF) has given
out grants up to around $30 million to four large local enterprises for investments in startups
in the city-state. This first of its kind partnership NRF has entered into is designed to
encourage these enterprises to source for new technologies and innovative business models.
Currently, the rules governing VC firms are being reviewed by the Monetary Authority of
Singapore (MAS) to make it easier to set up funds and increase funding opportunities for
start-ups. This mainly includes simplifying and shortening the authorization process for new
venture capital managers and to study whether existing incentives that have attracted
traditional asset managers here will be suitable for the VC sector. A public consultation on
the proposals was held in January 2017 with changes expected to be introduced by July.
Middle East and North Africa

The Middle East and North Africa (MENA) venture capital industry is an early stage of
development but growing. The MENA Private Equity Association Guide to Venture Capital
for entrepreneurs lists VC firms in the region, and other resources available in the MENA VC
ecosystem. Diaspora organization TechWadi aims to give MENA companies access to VC
investors based in the US.

Sub-Saharan Africa

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The Southern African venture capital industry is developing. The South African Government
and Revenue Service is following the international trend of using tax efficient vehicles to
propel economic growth and job creation through venture capital. Section 12 J of the Income
Tax Act was updated to include venture capital. Companies are allowed to use a tax efficient
structure similar to VCTs in the UK. Despite the above structure, the government needs to
adjust its regulation around intellectual property, exchange control and other legislation to
ensure that Venture capital succeeds.

Currently, there are not many venture capital funds in operation and it is a small community;
however the number of venture funds are steadily increasing with new incentives slowly
coming in from government. Funds are difficult to come by and due to the limited funding,
companies are more likely to receive funding if they can demonstrate initial sales or traction
and the potential for significant growth. The majority of the venture capital in Sub-Saharan
Africa is centered on South Africa and Kenya.
Confidential information

Unlike public companies, information regarding an entrepreneur's business is typically

confidential and proprietary. As part of the due diligence process, most venture capitalists
will require significant detail with respect to a company's business plan. Entrepreneurs must
remain vigilant about sharing information with venture capitalists that are investors in their
competitors. Most venture capitalists treat information confidentially, but as a matter of
business practice, they do not typically enter into Non Disclosure Agreements because of the
potential liability issues those agreements entail. Entrepreneurs are typically well advised to
protect truly proprietary intellectual property.

Limited partners of venture capital firms typically have access only to limited amounts of
information with respect to the individual portfolio companies in which they are invested and
are typically bound by confidentiality provisions in the fund's limited partnership agreement.
Governmental regulations

There are several strict guidelines regulating those that deal in venture capital. Namely, they
are not allowed to advertise or solicit business in any form as per the U.S. Securities and
Exchange Commission guidelines.

Factors Affecting Investment Decisions :

The venture capitalists usually take into account the following factors while making

1. Strong Management Team. Venture capital firms ascertain the strength of the
management team in terms of adequacy of level of skills,., commitment and motivation that
creates a balance between members in area such as marketing, finance and operations,
research and development, general management, personal management and legal and tax
issues. Track record of promoters is also taken into account.

2. A Viable Idea. Before taking investment decision, venture capital firms consider the
viability of project or the idea. Because a viable idea establishes the market for the product or
service. Why the customers will purchase the product, who the ultimate users are, who the
competition is with and the projected growth of the industry?

3. Business Plan. The business plan should concisely describe the nature of the business, the
qualifications of the members of the management team, how well; the business has
performed, and business projections and forecasts. The promoters experience in the proposed
or related businesses is an important consideration. The business plan should also meet the
investment objective of the venture capitalist.

4. Project Cost and Returns A. VCI would like to undertake investment in a venture only if
future cash inflows are likely to be more than the present cash outflows. While calculating the
Internal Rate of Return (IRR) the risk associated with the business proposal, the length of
.ime his money will be tied up are taken into consideration. Project cost, scheme of financing,
sources of finance, cash inflows for next five years are closely studied.

5. Future Market Prospects. The marketing policies adopted, marketing strategies in

relation to the competitors, market research undertaken, market size, share and future market
prospects are some of the considerations that affect the decision.

6. Existing Technology. Existing technology used and any technical collaboration

agreements entered into by the promoters also to a large extent affect the investment decision.

7. Miscellaneous Factors. Others factors which indirectly affect the investment decisions
include availability of raw material and labor, pollution control measures undertaken,
government policies, rules and regulations applicable to the business/industry, location of the
industry etc.

Selection of Venture Capitalists

Venture capital industry has shown tremendous growth during the last ten years. Thus, it
becomes necessary for the entrepreneurs to be careful while selecting the venture capitalists.
Following factors must be taken into consideration:

1. Approach adopted by VCs - Selection of VCs to a large extent depends upon the
approach adopted by VCs.

a. Hands on approach of VCs aims at providing value added services in an advisory role or
active involvement in marketing, recruitment and funding technical collaborators. VCs show
keen interest in the management affairs and actively interact with the entrepreneurs on
various issues.

b. Hands off approach refers to passive participation by the venture capitalists in

management affairs. VCs just receive. periodic financial statements. VCs enjoy the right to
appoint a director but this right is seldom exercised by them. In between the above two
approaches lies an approach where V C’ s approach is passive except in major decisions like
change in top management, large expansion or major acquisition.
(2) Flexibility in deals - The entrepreneurs would like to strike a deal with such venture
capitalists who are flexible and generous in their approach. They provide them a package
which best meet the needs of the entrepreneurs. VC’s having rigid attitude may not be

(3) Exit policy - The entrepreneurs should ask clearly the venture capitalists as to their exit
policies whether it is buy back or quotation or trade sale. To avoid conflicts, clarifications
should be sought in the beginning, the policy should not be against the interests of the
business. Depending upon the exit policy of the VCs, selection would be made by the

(4) Fund viability and liquidity - The entrepreneurs must make sure that the VCs has
adequate liquid resources and can provide later stage financing if the need arises, also, the
VC has committed backers and is not just interested in making quick financial gains.

(5) Track record of the VC & its team - The scrutiny of the past performance, time since
operational, list of successful projects financed earlier etc. should be made by the
entrepreneur. The team of VCs, their experience, commitment, guidance during bad times are
the .other consideration affecting the selection of VCs.

Procedure Followed by VCs

a. Receipt of proposal. A proposal is received by the venture capitalists in the form of a

business plan. A detailed and well-organised business plan helps the entrepreneur in gaining
the attention of the VCs and in obtaining funds. A well-prepared business proposal serves
two functions.

1. It informs the venture capitalists about the entiepreneurs ideas.

2. It shows that the entrepreneur has detailed knowledge about the proposed business and is
aware of the all potential problems.

b. Appraisal of plan. VC appraises the business plan giving due regard to the
creditworthiness of the promoters, the nature of the product or service to be developed, the
markets to be served and financing required. VCs also conduct cost-benefit analysis by
comparing future expected cash inflows with present investment.
c. Investment. If venture capital fund is satisfied with the future profitability of the company,
it will take step to invest his own money in the equity shares of the new company known as
the assisted company.

d. Provide value added services. Venture capitalists not only invest money but also provide
managerial and marketing assistance and operational advice. They also make efforts to
accomplish the set targets which consequently results in appreciation of their capital.

e. Exit. After some years, when the assisted company has reached a certain stage of
profitability the VC sells his shares in the stock market at high premium, thus earning profits
as well as releasing locked up funds for redeployment in some other venture and this cycle
Venture Capital Investment Criteria

Venture Capital investment refers to the capital invested into “risky” ventures to
obtain a very high rate of returns. Venture Capital is invested into equities rather than loans to
get a good rate of return. The Venture Capital is provided to companies in the various stages
of development and Venture Capital investment criteria are the methodologies followed by
Venture Capitalists to select appropriate ventures for investment.

Venture Capital investment criteria is not just meant for small and mid-sized
businesses but it can be an investment into a project of a large business, or into a startup
company aiming to grow significantly. The Venture Capital investment criteria are based on
the potential of the company to grow fast within a limited time period and resources. The
Venture Capital investment criteria define the set of rules for investment in ventures to get a
high growth potential. The ventures which can provide great returns and the ventures where
the investor can have a successful “exit “ within the desired time period of investment
varying from three to seven years is considered to be an ideal Venture Capital investment
option. The startup company which is based on innovative structure and a well designed
business model supported by a strong management team attracts Venture Capitalists. The
Venture Capitalists ensure stocks follow the desired Venture Capital investment criteria to
make mature investment in stocks to get high returns.

Venture Capitalists should follow the some of the basic Venture Capital investment
criteria before making any investment. The basic Venture Capital investment criteria are
“never pay with pay off” and “keep an exit plan.” The Venture Capitalists should never pay
with pay off and always keep money for personal needs before spending on Venture Capital
because the failure rate in venture investment can be more than 50%. In some stocks it can
more than 90% and if the venture fails, the entire funding is written off.

The Venture Capitalists spend money to raise more money and the Venture Capital
investment criteria help them to make the right options. Some significant Venture Capital
investment criteria are as follows:
Criteria 1: More Risk More Returns One of the main - Venture Capital investment
criteria is “more risk gives more returns.” Investment in risky ventures can get higher returns
if the ventures are selected carefully. The investor should know for which stage of
development the investment is needed. It will provide a basic idea of the risk factor involved
and time period of investment. There are different options to make venture money – IPO, and
Merger and Acquisition. The initial public offering or IPO of a large company is most
attractive of Venture Capital investments because it comes with a low risk.

Criteria 2: Company’s Profile The Venture Capital investment criteria are mostly
based on the company’s profile. The company should be a fast growing company which has a
huge market presence and the company should have abundant intellectual property to be able
to put barrier to its competitor’s growth. The company should be large or reputed enough to
be able to grow fast. The company should be into a promising business field.

Criteria 3: Company’s Development Stage Venture Capital investment criteria are

designed to know the stage of growth of the company and the risk involved. Generally,
Venture Capital investment is needed for four different stages of the company’s development
- Idea generation, Start up, Ramp up and Exit (ISRE). The Venture Capital can be for getting
the “seed money” for introducing a new idea in the market. Since the risks involved in new
venture is high, the profits are also high in new ventures. It can be for start up of a company,
or the company may need funds for marketing and development. Some companies require
Venture Capital for first round – early sales and manufacturing, and some companies may
need working capital. The company may require money for expansion or for going public.

Criteria 4: The business model Venture Capital investment criteria are about secure
and high returns, and the business model of the company enables it to grow fast. A company
fulfills the Venture Capital investment criteria if the products sold by the company have a
high market demand. The company should be able to deliver products to make customers
repeat customers. The company should be able to generate more revenues with limited
resources. The business model should fulfill the Venture Capital investment criteria. It should
have the potential to attract customers and stay ahead of competitors.

Criteria 5: Management team A strong management team is needed for a company to

sustain for long. If a company is not supported by a strong management, it will not be able to
deliver its plans and the company may not perform well, therefore, a good management team
is one of the most important Venture Capital investment criteria. There are many companies
which fail to deliver the expected results because there are clashes within the top
management. The leading management of the company should be strong, professional and
expert at its job. The management team should have skilled, realistic, honest and seasoned
group of people who have the capability to turn plans into reality. The company should have
people to be able to anticipate the problems and prevent the company from dangers. Both the
top management and the marketing teams of a company should be strong to keep it going.

Criteria 6: Company’s Valuation The market valuation of company in term of

investments and equity should be attractive because a good valuation reduces the risks
involved in the investment.

Criteria 7: The Exit Plan Venture Capitalists mostly hold the stocks for three to
seven years and they should have a proper “exit plan” to opt out of investment.
Advantages of Venture Capital Fund

(i) Advantages to Investing Public • The investing public will be able to reduce risk
significantly against unscrupulous management, if the public invest in venture fund who in
turn will invest in equity of new business. With their expertise in the field and continuous
involvement in the business they would be able to stop malpractices by management.

• Investors no means to vouch for the reasonableness of the claims made by the promoters
about profitability of the business. The venture funds equipped with necessary skills will be
able to analyze the prospects of the business.

• Investors do not have any means to ensure that the affairs of the business are conducted
prudently. The venture fund having representatives on the Board of Directors of the company
would overcome it.

(ii) Advantages to promoters • The entrepreneur for the success of public issue is required
to convince tens of underwriters, brokers and thousands of investors but to obtain Venture
Capital assistance; he will be required to sell his idea to justify the officials of the venture
fund. Venture Capital provides a solid capital base for future growth by injecting long-term
equity financing.

• Public issue of equity; shares has to be preceded by a lot of efforts. Necessary statutory
sanctions, underwriting and brokers arrangement, publicity of issue etc. the new
entrepreneurs find it very difficult to make underwriting arrangements require a great deal of
effort. Venture fund assistance would eliminate those efforts by leaving entrepreneur to
concentrate upon bread and butter activities of business.

• Costs of public issues of equity share often range between 10 percent to 15 percent of
nominal value of issue of moderate size, which are often even higher for small issues. The
company is required, in addition to above, to incur recurring costs for maintenance of share
registry cell, stock exchange listing fee, expenditure on printing and posting of annual reports
etc. These items of expenditure can be ill afforded by the business when it is new. Assistance
from venture fund does not require such expenditure.
• Business partner: the Venture Capitalists act as business partners who share the rewards as
well as the risks.

• Mentoring: Venture Capitalists provide strategic, operational tactical and financial advice
based on past experience with other companies in similar situations.

• Alliances: the Venture Capitalists help in recruitment of key personnel, improving

relationship with international markets, co-investment with other VC firms and in decision

(iii) Advantages to Society in General • A developed Venture Capital institutional set-up

reduces the time lag between a technological innovation and its commercial exploitation.

• It helps in developing new process/products in conducive atmosphere, free from the dead
weight of corporate bureaucracy, which helps in exploiting full potential.

• Venture Capital acts as a cushion to support business borrowings, as bankers and investors
will not lend money with inadequate margin of equity capital.

• Once Venture Capital funds start earning profits, it will be very easy for them to raise
resources from primary capital market in the form of equity and debts. Therefore, the
investors would be able to invest in new business through venture funds and, at the same
time, they can directly invest in existing business when venture fund disposes its own
holding. This mechanism will help to channelize investment in new high-tech business or the
existing sick business. These business will take- off with the help of finance from venture
funds and this would help in increasing productivity, better capacity utilization etc.

• The economy with well developed Venture Capital network induces the entry of large
number of technocrats in industry, helps in stabilizing industries and in creating a new set of
trained technocrats to build and manage medium and large industries, resulting in faster
industrial development.

• A Venture Capital firm serves as an intermediary between investors looking for high
returns for their money and entrepreneurs in search of needed capital for their start ups.

• It also paves the way for private sector to share the responsibility with public sector.

It is essential that Venture Capital Funding agencies play a major role in providing
capital to industrial enterprises especially the SME’s if the Indian economy has to grow
rapidly. There is a strong case for Venture Capital Funding for SME’s. Judging from the
success in the IT, Biotechnology, Retail and Pharma sectors the VCF agencies can explore
possibilities of funding SME’s in manufacturing and other sectors also. The government has
brought in suitable regulations through the RBI, SEBI and other institutions to facilitate
Venture Capital Funding. VCF agencies should aggressively promote funding and nurture
promising SME’s The PSB’s and FI’s in India who were reluctant to foray into venture
capital funding have now realised its potential and are willing to partner Indian VCF agencies
by providing funds. VCF agencies should not only engage in funding but also provide
managerial guidance and support to SME’ s to compete in the present global environment and
enable them to achieve turnovers and profits, which will ultimately result in the enterprise
going public in the shortest period.

Importance of venture capital

1. Promotes Entrepreneurs: Just as a scientist brings out his laboratory findings to reality and
makes it commercially successful, similarly, an entrepreneur converts his technical know-
how to a commercially viable project with the assistance of venture capital institutions.

2. Promotes products: New products with modern technology become commercially feasible
mainly due to the financial assistance of venture capital institutions.

3. Encourages customers: The financial institutions provide venture capital to their customers
not as a mere financial assistance but more as a package deal which includes assistance in
management, marketing, technical and others.

Example: Hot mail dot com. It was a project invented by an young Indian graduate from
Bangalore, by name Sabir Bhatia. This project was developed by him due to the financial
assistance provided by the venture capital firms in Silicon Valley, U.S.A. His project was
later on purchased by Microsoft company, U.S.A. The Chairman of the company, Mr. Bill
Gates offered 400 Million US Dollars in hot cash.

4. Brings out latent talent: While funding entrepreneurs, the venture capital institutions give
more thrust to potential talent of the borrower which helps in the growth of the borrowing

5. Promotes exports: The Venture capital institution encourages export oriented units because
of which there is more foreign exchange earnings of the country.

6. As Catalyst: A venture capital institution acts as more as a catalyst in improving the

financial and managerial talents of the borrowing concern. The borrowing concerns will be
more keen to become self dependent and will take necessary measures to repay the loan.

7. Creates more employment opportunities: By promoting entrepreneurship, venture capital

institutions are encouraging self employment and this will motivate more educated
unemployed to take up new ventures which have not been attempted so far.

8. Brings financial viability: Through their assistance, the venture capital institutions not only
improve the borrowing concern but create a situation whereby they can raise their own capital
through the capital market. In the process they strengthen the capital market also.

9. Helps technological growth: Modern technology will be put to use in the country when
financial institutions encourage business ventures with new technology.

10. Helps sick companies: Many sick companies are able to turn around after getting proper
nursing from the venture capital institutions.

11. Helps development of Backward areas: By promoting industries in backward areas,

venture capital institutions are responsible for the development of the backward regions and
human resources.

12. Helps growth of economy: By promoting new entrepreneurs and by reviving sick units, a
fillip is given to the economic growth. There will be increase in the production of consumer
goods which improves the standard of living of the people.

SWOT analysis of Indian Venture Capital


• One of the fastest growing economies; high domestic consumption-driven growth

• Strong entrepreneurial ecosystem and private sector

• VCPE investments growing at of 63% (from US$ 1 billion in 2002 to US$ 51.6 billion by 2010)

• High intellectual capital, leading to emergence of VC hotspots (E.g., Bangalore)

• Active equity capital and transaction markets facilitating exit options

• Vibrant VCPE market with more than 250 GPs and most of the large global funds


• Regulatory restrictions on foreign investment in certain sectors, albeit easing gradually

• Lack of availability of debt for transactions


• Significant growth in dispensable income and hence demand for products and services

• Capital is required for core sectors (e.g., infrastructure, manufacturing, health care)

• Stable government with a long-term secular and growth-oriented outlook


• Competition from emerging nations (e.g., Brazil, China) to attract foreign VCPE funds

• The impact of proposed widespread changes in regulatory and tax policy is not fully clear outlook

• Heightened PE interest and activity levels are expected as a result of broadbased economic
growth, stable government and strong capital markets
• Growth capital minority deals are expected to remain the major theme with buyouts still rare.