A Project Submitted for

“STUDY OF VENTURE CAPITAL IN INDIA”

Project submitted for the partial fulfilment of
“MASTER OF BUSSINESS ADMINISTRATION”

SESSION 2018-19

PRASAD INSTITUTE OF TECHNOLOGY, JAUNPUR

SUBMITTED BY
GAURAV GAUN(MBA 3RD sem)
Roll.no: 1814470006
PROJECT GUIDE
HR.ROHINI SRIVASTAVA
(MBA, HUMAN RESOURCE)

LUCKNOW, NARAHI 226001

 PROJECT TITLE: -

“STUDY OF
VENTURE
CAPITAL IN
INDIA”
 DECLARATION
I, the undersigned, student of PRASAD INSTITUTE OF
TECHNOLOGY, Master of Business administration (MBA 3rd SEM).
Hereby declare that I have completed this project on “Study
of Venture Capital in India”in the academic year 2018-2019.

The information submitted in this project is true and original

to the best of my knowledge.

______________
GAURAV GAUN
Date: _____________ MBA 3rd SEM
 CERTIFICATE

This is to certified that Mr. Gaurav Gaun has successfully

completed the project work as partial fulfilments of the
requirement for the MASTER OF BUSINESS
ADMINISTRATIION inthe academic year 2019-2020.

Date:_______________ Sing.:_________________

ACKNOWLEDGEMENT
One of the pleasant aspects of preparing a project report is
the opportunity to thank to those who have contributed to
make the project completion possible.
I am extremely thankful to Hr. ROHINI SRIVASTAVA, whose
active interest in the project and insights helped me
formulate, redefine and implement our approach toward the
project.
I am also thankful to all those seen and unseen hands &
heads, which have been of direct or indirect, help in the
completion of this project.

VISION
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MISSION

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To be an emanated quality technical hub for Software’s, Web, Apps, Finance,

HR Training, and to help our customers to achieve the best-in-class quality of
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Cosmo Info Solutions is committed to producing the best quality of creative

and compelling products and services for government agencies, students,
private organizations, and NGOs.

PREFACE
In India, a revolution is ushering in a new economy, wherein major investment
are being made in the knowledge based industry with substantially low
investments in land, building, plant and machinery. The asset/ collateral-
backed lending instruments adopted for the hard for the hard core
manufacturing industries, are proving to be inadequate for the knowledge-
based industries that often start with just idea.

The only way to finance such industries is through Venture Capital. Venture
Capital is instrumental in bringing about industrial development, for it exploits
the vast and untapped potentialities and promotes the growth of the
knowledge- based industries worldwide.

In India too, it has become popular in different parts of the country. Thus, the
role of venture capitalist is very crucial, different, and distinguishable to the
role of traditional finance as it deals with others’ money. In view of the
globalization; venture Capital has turned out to be a boon to both business and
industry.

This report, which contains in-depth study of Venture Capital Industry in India,
is made with an intension to get through all the aspects related to the topic
and to become able to make some suggestion at the industry. This report deals
with the concept of Venture Capital, with particular reference to India. The
report includes all facts, rules and regulations regarding Venture Capital.
  EXECUTIVE SUMMARY

Venture capital is a growing business of recent origin in the area of industrial

financing in India. The various financial institution set-ups in India to promote
industries have done commendable work. However, these institutions do not
come up to benefit risky ventures when they are undertaken by new or relatively
unknown entrepreneurs. They contend to give debt finance, mostly in the form
of term loans to the promoters and their functioning has been more akin to that
of commercial banks.

Starting and growing a business always require capital. There are a number of
alternative methods to fund growth. These include the owner or proprietor’s
own capital, arranging debt finance, or seeking an equity partner, as is the case
with private equity and venture capital.

Venture capital is a means of equity financing for rapidly-growing private

companies. Finance may be required for the start-up, development/expansion or
purchase of a company. Venture Capital firms invest funds on a professional
basis, often focusing on a limited sector of specialization (eg. IT, Infrastructure,
Health/Life Sciences, Clean Technology, etc.).

Indian Venture capital and Private Equity Association(IVCA) is a member

based national organization that represents venture capital and private equity
firms, promotes the industry within India and throughout the world and
encourages investment in high growth companies.

IVCA member comprise venture capital firms, institutional investors, banks,

incubators, angel groups, corporate advisors, accountants, lawyers, government
bodies, academic institutions and other service providers to the venture capital
and private equity industry.
 Table of contents
Sr. No. Particular Page No.

Declaration 3

Certification 4

Acknowledgment 5

Mission & Vision of institute 6

Preface 7

Executive Summary 8

1. Introduction To Project (Synopsis) 12-17

 Objective Of The Study 13

 Statement Of Problems 14

 Limitation Of Project 16

 Scope Of The Project 16

 Research Design And Instruments 17

2. Conceptual Framework 18-57

 Concept Of Venture Capital 19

 Features Of Venture Capital 21

 Venture Capital Spectrum/Stages 23

  Venture Capital Investment Process 36

 Methods Of Venture Financing 43

 Difference Between Venture Capital And Other Funds(Private 45

Equity)

 Venture Capital & Alternative Financing Comparison 47

 Players Venture Capital Industry 54

3. Global Scenario Of Venture Capital Industry 58-95

 Overview 59

 History & Evolution 59

 Current Industry Trends 64

 Growth Of Venture Capital In Global 67

 2009 Global Venture Capital Industry Survey 69

 China, India And Israel Will Be Most Attractive Growth Of 89

Venture Capital

 Primary Reasons For Venture Capital Investors Expanding 92

Globally

 Investing Globally By Investing Locally 94

 Impediments To Global Investing 95

4. Venture Capital In India 96-142

 Evolution Of Venture Capital Industry In India 97

  Objective And Vision For Venture Capital In India 100

 Venture Capital Industry Life Cycle In India 101

 Growth Of Venture Capital In India 105

 2009 Venture Capital Investment In India 108

 Need For Growth Of Venture Capital In India 109

 Regulatory And Legal Framework 111

 Major Regulatory Framework For Venture Capital Industry 112

 Regulation Of The Business Of Venture Capital In India 117

 Key Success Factor For Venture Capital Industry In India 120

 Industrial Attractiveness 123

 Domestic Economic Factors 124

 Guidelines For Overseas Venture Capital Investment In India 130

 Challenges Ahead For Venture Capital Financing In India 132

 Problems Of Venture Capital Financing In India 133

 Opportunities And Threats 134

5. Recommendations 142

6. Conclusion 150
INTRODUCTION TO

PROJECT

(SYNOPSIS)
 OBJECTIVES OF THE STUDY

 Understand the concept of venture capital.Venture Capital funding is

different from traditional sources of financing. Venture capitalists finance
innovation and ideas which have potential for high growth but with
inherent uncertainties. This makes it a high-risk, high return investment.
 Study venture capital industry in India.Scientific, technology and
knowledge based ideas properly supported by venture capital can be
propelled into a powerful engine of economic growth and wealth creation
in a sustainable manner. In various developed and developing economies
venture capital has played a significant developmental role.
 Study venture capital industry in global scenario.Venture capital has
played a very important role in U.K., Australia and Hong Kong also in
development of technology growth of exports and employment.
 Study the evaluation & need of venture capital industry in India.India
is still at the level of ‘knowledge’. Given the limited infrastructure, low
foreign investment and other transitional problems, it certainly needs
policy support to move to the next stage. This is very crucial for
sustainable growth and for maintaining India’s competitive edge
 Understand the legal framework formulated by SEBI to encourage
venture capital activity in Indian economy. Promoting sound public
policy on issues related to tax, regulation and securities through
representation to the Securities and Exchange Board of India (SEBI),
Ministry of Finance (MoF), Reserve Bank of India (RBI) and other
Government departments
 Find out opportunities that encourage & threats those hinder venture
capital industry in India.
  To know the impact of political &economical factors on venture
capital investment.
 STATEMENT OF PROBLEMS

Venture capital is in its nascent stages in India. The emerging scenario of global
competitiveness has put an immense pressure on the industrial sector to improve
the quality level with minimization of cost of products by making use of latest
technological skills. The financing firms expect a sound, experienced, mature
and capable management team of the company being financed. Since the
innovative project involves a higher risk, there is an expectation of higher
returns from the project. The payback period is also generally high (5 - 7 years).

The various problems/ queries can be outlined as follows:

 Problems regarding the infrastructure details of production like plant

location, accessibility, relationship with the suppliers and creditors,
transportation facilities, labour availability etc.
 The limited infrastructure, low foreign investment and other transitional
problems, because of above three reasons availability of fund is very low
in market.
 Uncertainty regarding the success of the product in the market.
 As there is requirement of an experienced management team, Due to
unavailability of experienced and skilled people it is difficult to analyze
the future growth of the product in the market.
 Government has taken all the Initiatives in formulating policies to
encourage investors and entrepreneurs. A government policy has many
rules and regulation that can create problems in allocating the fund to the
Organizations.
 Initiatives of the SEBI to develop a strong and vibrant capital market
giving the adequate liquidity and flexibility for investors for entry and
exit. Due to many rules and regulations from SEBI organization face lots
of difficulties at the time of entering in the market.
 LIMITATION OF PROJECT
A study of this type cannot be without limitations. It has been observed those
venture capitals are very secretive about their investments. This attitude is a
major hindrance for data collection. However venture capital funds/companies
that are members of Indian venture capital association are to be included in
the study.

 SCOPE OF THE PROJECT

The scope of the research includes all types of venture capital firms set up as a
company & funds irrespective of the fact that they are registered with SEBI of
India or not part of this study
  RESEARCH DESIGN AND INSTRUMENTS

In India neither venture capital theory has been developed nor are there many
comprehensive books on the subject. Even the number of research papers
available is very limited. The research design used is descriptive in nature. (The
attempt has been made to collect maximum facts and figures available on the
availability of venture capital in India, nature of assistance granted, future
projected demand for this financing, analysis of the problems faced by the
entrepreneurs in getting venture capital, analysis of the venture capitalists and
social and environmental impact on the existing framework.)

The research is based on secondary data collected from the published

material. The data was also collected from the publications and press releases
of venture capital associations in India.

Scanning the business papers filled the gaps in information. The Economic
times, Financial Express and Business Standards were scanned for any article or
news item related to venture capital. Sufficient amount of data about the
venture capital has been derived from this project.
“CONCEPTUAL
FRAMEWORK”
  CONCEPT OF VENTURE CAPITAL

The term venture capital comprises of two words that is, “Venture” and
“capital”. “Venture” is a course of processing the outcome of which is
uncertain but to which is attended the risk or danger of “Loss”. “Capital”
means recourses to start an enterprise. To connote the risk and adventure of
such a fund, the generic name Venture Capital was coined.

Venture capital is considered as financing of high and new technology based

enterprises. It is said that Venture capital involves investment in new or
relatively untried technology, initiated by relatively new and professionally or
technically qualified entrepreneurs with inadequate funds. The conventional
financiers, unlike Venture capitals mainly finance proven technologies and
established markets. However, high technology need not be prerequisite for
venture capital.

Venture capital has also been described as ‘unsecured risk financing’. The
relatively high risk of venture capital is compensated by the possibility of high
return usually through substantial capital gains in term. Venture capital in
broader sense is not solely an injection of funds into a new firm, it is also an
input of skills needed to set up the firm, design its marketing strategy, organize
and manage it. Thus it is a long term association with successive stages of
companies development under highly risky investment condition with
distinctive type of financing appropriate to each stage of development.
Investors join the entrepreneurs as co-partners and support the project with
finance and business skill to exploit the market opportunities.
The most flexible Definition of Venture Capital is: -

‘The support by investors of entrepreneurial talent with finance and business

skills to exploit market opportunities and thus obtain capital gains.’

Venture capital commonly describes not only the provision of startup finance
or seed corn capital but also development capital for later stages of business. A
long-term commitment of funds is involved in the form of equity investments,
with the aim of eventual capital gains rather than income and active
involvement in the management of customers business.
  FEATURES OF VENTURE CAPITAL

 High Risk
 High Tech
 Equity Participation & Capital Gains
 Participation In Management
 Length Of Investment
 Illiquid Investment

 High Risk

By definition the Venture capital financing is highly risky and chances of failure
are high as it provides long term startup capital to high risk- high reward
ventures. Ventures capital assumes four type of risks, these are:

o Management risk -Inability of management teams to work together.

o Market risk -Product may fail in the market.
o Product risk -Product may not be commercially viable.
o Operation risk-Operation may not be cost effective resulting in
increased cost decreased gross margin.

 High Tech

As opportunities in the low technology area tend to be few of lower order, and
hi-tech projects generally offer higher returns than projects in more traditional
area, venture capital investments are made in high tech. areas using new
technologies or producing innovative goods by using new technology. Not just
high technology, any high-risk ventures where the entrepreneur has conviction
but little capital gets venture finance. Venture capital is available for expansion
of existing business or diversification to a high-risk area. Thus, technology
financing had never been the primary objective but incidental to venture
capital.

 Equity Participation & Capital Gains

Investments are generally in equity and quasi equity participation through

direct purchase of share, options, convertible debentures where the debt
holder has the option to convert the loan instruments into stock of the
borrower or a debt with warrants to equity investment. The funds in the form
of equity help to raise term loans that are cheaper source of funds. In the early
stage of business, because dividends can be delayed, equity investment implies
that investors bear the risk of venture and would earn a return commensurate
with success in the form of capital gains.

 Participation In management

Venture capital provides value addition by managerial support, monitoring and

follow up assistance. It monitors physical and financial progress as well as
market development initiative. It helps by identifying key resource person.
They want one seat on the company’s board of directors and involvement, for
better or worse, in the major decision affecting the direction of company. This
is a unique philosophy of hand on management where Venture capitalist acts
as complementary to the entrepreneurs. Based upon the experience other
companies, a venture capitalist advice the promoters on project planning,
monitoring, financial management, including working capital and public issue.
Venture capital investor cannot interfere in day today management of the
enterprise but keeps a close contact with the promoters or entrepreneurs to
protect his investment.

 Length of Investment

Venture capitalist help companies grow, but they eventually seek to exit the
investment in three to seven years. An early stage investment may take seven
to ten years to mature, while most of the later stage investment takes only a
few years. The process of having significant returns takes several years and
calls on the capacity and talent of venture capitalist and entrepreneurs to
reach fruition.

 Illiquid Investment

Venture capital investments are illiquid, that is not subject to repayment on

demand or following a repayment schedule. Investors seek return ultimately
by means of capital gain when the investment is sold at market place. The
investment is realized only on enlistment of security or it is lost if enterprise is
liquidated for unsuccessful working. It may take several years before the first
investment starts too locked for seven to ten years. Venture capitalist
understands this illiquidity and factors this in his investment decision.

 THE VENTURE CAPITAL SPECTRUM/STAGES

The growth of an enterprise follows a life cycle as shown in the diagram below.
The requirements of funds vary with the life cycle stage of the enterprise. Even
before a business plan is prepared the entrepreneur invests his time and
resources in surveying the market, finding and understanding the target
customers and their needs. At the seed stage the entrepreneur continue to
fund the venture with his own fund or family funds. At this stage the fund is
needed to solicit the consultant’s services in formulation of business plans,
meeting potential customers and technology partners. Next the funds would
be required for development of the product/process and producing
prototypes, hiring key people and building up the managerial team. This is
followed by funds for assembling the manufacturing and marketing facilities in
that order. Finally, the funds are needed to expand the business and attaint
the critical mass for profit generation. Venture capitalists cater to the needs of
the entrepreneurs at different stages of their enterprises. Depending upon the
stage they finance, venture capitalists are called angel investors, venture
capitalist or private equity supplier/investor.

Venture capital was started as early stage financing of relatively small but
rapidly growing companies. However various reasons forced venture capitalists
to be more and more involved in expansion financing to support the
development of existing portfolio companies. With increasing demand of
capital from newer business, venture capitalists began to operate across a
broader spectrum of investment interest. This diversity of opportunities
enabled venture capitalists to balance their activities in term of time
involvement, risk acceptance and reward potential, while providing ongoing
assistance to developing business.
 Introduction
stage Grow
Later Stage
th
Early Stage
Seed
Stage
Capit Second
al Stage

Startup Capital
Venture Capital Spectrum/Stage

Different Venture capital firms have different attributes and aptitudes for
different types of Venture capital investments. Hence there are different
stages of entry for different venture capitalists and they can identify and
differentiate between types of venture capital investments, each appropriate
for the given stage of the investee company, these are:-

1. Early stage Finance

 Seed capital
 Start-up Capital
 Early/First Stage Capital
 Later/Third Stage capital

2. Later Stage Finance

  Expansion/Development Stage Capital
 Replacement Finance
 Management Buy Out and Buy Ins
 Turnarounds
 Mezzanine/Bridge Finance

Not all business firms pass through each of these stages in sequential manner.
For instance, seed capital is normally not required by service-based ventures. It
applies largely to manufacturing or research-based activities. Similarly, second
round finance does not always follow early stage finance. If the business grows
successfully it is likely to develop sufficient cash to fund its own growth, so
does not require venture capital for growth.

The table below shows risk perception and time orientation for different stages
of venture capital financing.

Financing Stage Period (funds Risk perception Activity to be financed

locked in years)
Early stage finance 7-10 Extreme For supporting a concept
or idea or R & D for
product development
Start up 5-9 Very high Initializing operations or
developing prototypes
First stage 3-7 High Start commercial
production and marketing
Second stage 3-5 Sufficiently high Expand market & growing
working capital need
Later stage finance 1-3 Medium Market expansion,
 acquisition & product
development for profit
making company
Buy out-in 1-3 Medium Acquisition financing
Turnaround 1-3 Medium to high Turning around a sick
company
Mezzanine 1-3 Low Facilitating public issue

Venture Capital- Financing Stages

 Seed Capital

It is an idea or concept as opposed to a business. European venture capital

association defines seed capital as the financing of the initial product
development or capital provided to an entrepreneur to prove the feasibility of
a project and to qualify for start-up capital.

The characteristics of the seed capital may be enumerated as follows:

o Absence of ready product market

o Absence of complete management team
o Product/process still in R & D stage
o Initial period/licensing stage of technology transfer

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

realization. It is the earliest and therefore riskiest stage of Venture capital
investment. The new technology and innovations being attempted have equal
chance of success and failure. Such projects, particularly hi-tech, projects sink a
lot of cash and need a strong financial support for their adaptation,
commencement and eventual success. However, while the earliest stage of
financing is fraught with risk, it also provides greater potential for realizing
significant gains in long term. Typically seed enterprises lack asset base or track
record to obtain finance from conventional sources and are largely dependent
upon entrepreneur’s personal resources. Seed capital is provided after being
satisfied that the entrepreneur has used up his own resources and carried out
his idea to a stage of acceptance and has initiated research. The asset
underlying the seed capital is often technology or an idea as opposed to
human assets (a good management taem0 so often sought by venture
capitalists.

Volume of Investment Activity

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

a) Seed capital projects by their very nature require a relatively small

amount of capital. The success or failure of an individual seed capital
investment will have little impact on the performance of all but the
smallest venture capital investments. This is because the small
investments are seen to be cost inefficient in terms of time required to
analyse structure manage them.
b) The time horizon to realization for most seed capital investment is
typically 7-10 years which is longer than all but most long-term oriented
investors will desire.
 c) The risk of product and technology obsolescence increases as the time
to realization I extended. These types of obsolescence are particularly
likely to occur with high technology investments particularly in the fields
related to Information Technology.

 Start Up Capital

It is stage second in the venture capital cycle and is distinguishable from seed
capital investments. An entrepreneur often needs finance when the business is
just starting. The start-up stage involves starting a new business. Here in the
entrepreneur has moved closer towards establishment of a going concern.
Here in the business concept has been fully investigated and the business risk
now becomes that of turning the concept into product.

Start-up capital is defined as; Capital needed to finance the product

development, initial marketing and establishment of product facility.

The characteristics of start-up capital are:-

a) Establishment of company or business: the company is either being

organized or is established recently. New business activity could be
based on experts, experience or a spin-off from R & D.
b) Establishment of most but not all the members of the team: the skills
and fitness to the job and situation of the entrepreneur’s team is an
important factor for start-up finance.
c) Development of business plan or idea: the business plan should be fully
developed yet the acceptability of the product by the market is
uncertain. The company has not yet started trading.
In the start-up preposition Venture capitalist’s investment criteria shifts from
idea to people involved in the venture and the market opportunity. Before
committing any finance at this stage, venture capitalist however, assesses the
managerial ability and the capacity of the entrepreneur, besides the skills,
suitability and competence of the managerial team are also evaluated. If
required they supply managerial skill and supervision for implementation. The
time horizon for start-up capital will be typically 6 or 8 years. Failure rate for
start-up is 2 out of 3. Start-up needs funds by way of both first-round
investment and subsequent follow-up investments. The risk tends to be lower
relative to seed capital situation. The risk is controlled by initially investing a
smaller amount of capital in start-ups. The decision on additional financing is
based upon the successful performance of the company. However, the term to
realization of a start-up investment remains longer than the term of finance
normally provided by the majority of financial institutions. Longer time scale
for using exit route demands continued watch on start-up projects.

Volume of Investment Activity

Despite potential for secular returns most venture firms avoid investing in
start-ups. One reason for the paucity of start up financing may be high
discount rate that venture capitalist applies to venture proposals at this level
of risk and maturity. They often prefer to spread their risk by sharing the
financing. Thus syndicates of investors often participate in start-up finance.
  Early Stage Finance

It is also called first stage capital is provided to entrepreneur who has a proven
product, to start commercial production and marketing, not covering market
expansion, de-risking and acquisition costs.

At this stage the company passed into early success stage of its life cycle. A
proven management team is put into this stage, a product is established and
an identifiable market is being targeted.

British Venture capital Association has vividly defined early stage finance as:
“Finance provided to companies that have completed the product
development stage and require further funds to initiate commercial
manufacturing and sales but may not be generating profits.

The characteristics of early stage finance may be:-

 Little or no sales revenue.

 Cash flow and profit still negative.
 A small but enthusiastic management team which consists of people
with technical and specialist background and with little experience in
the management of growing business.
 Short term prospective for dramatic growth in revenue and profits.

The early stage finance usually takes 4 to 6 years-time horizons to realization.

Early stage finance is the earliest in which two of the fundamentals of business
are in place i.e. fully assembled management team and a marketable product.
A company needs this round of finance because of any of the following
reasons:-
  Project overruns on product development.
 Initial loss after start-up phase.

The firm needs additional equity funds, which are not available from other
sources thus prompting venture capitalist that, have financed the start-up
stage to provide further financing. The management risk is shifted from factors
internal to the firm (lack of management, lack of product etc.) to factor
external to the firm (competitive pressures, in sufficient will of financial
institutions to provide adequate capital, risk of product obsolescence etc.)

At this stage, capital needs, both fixed and working capital needs are greatest.
Further, since firms do not have foundation of a trading record, finance will be
difficult to obtain and so venture capital particularly equity investment without
associated debt burden is key to survival of the business.

The following risks are normally associated to firms at this stage: -

a) The early stage firms may have drawn the attention of and incurred the
challenge of a larger competition.
b) There is a risk of product obsolescence. This is more so when the firm is
involved in high-tech business-like computer, information technology
etc.

 Second stage Finance

It is the capital provided for marketing and meeting the growing working
capital needs of an enterprise that has commenced the production but does
not have positive cash flows sufficient to take care of its growing needs.
Second stage finance, the second trench of Early Stage Finance is also referred
to as follow on finance and can be defined as the provision of capital to the
firm which has previously been in receipt of external capital but whose
financial needs have subsequently exploded. This may be second or even third
injection of capital.

The characteristics of a second stage finance are:

 A developed product on the market

 A full management team in place
 Sales revenue being generated from one or more products
 There are losses in the firm or at best there may be a breakeven but the
surplus generated is insufficient to meet the firm’s needs.

Second round financing typically comes in after start up and early stage
funding and so have shorter time to maturity, generally ranging from 3 to 7
years. This stage of financing has both positive and negative reasons.

Negative reasons include:

 Cost overruns in market development

 Failure of new product to live up to sales forecast.
 Need to re-position products through a new marketing campaign
 Need to re-define the product in the market place once the product
deficiency is revealed.

Positive reasons include:

 Sales appear to be exceeding forecasts and the enterprise needs to

acquire assets to gear up for production volumes greater than forecasts.
  High growth enterprises expand faster than their working capital permit,
thus needing additional finance. Aim is to provide working capital for
initial expansion of an enterprise to meet needs of increasing stocks and
receivables.

It is additional injection of funds and is an acceptable part of venture capital.

Often provision for such additional finance can be included in the original
financing packages as an option, subject to certain management performance
targets.

 Later Stage Finance

It is called third stage capital is provided to an enterprise that has established

commercial production and basic marketing set-up, typically for market
expansion, acquisition product development etc. it is provided for market
expansion of the enterprise.

The enterprises eligible for this round of finance have following

characteristics:

 Established business, having already passed the risky early stage.

 Expanding high yield, capital growth and good profitability.
 Reputed market position and an established formal organization
structure.

Funds are utilized for further plant expansion, marketing, working capital or
development of improved products. Third stage financing is a mix of equity
with debt or subordinate debt. As it is half way between equity and debt in US
it is called mezzaninefinance. It is also called last round of finance in run up to
the trade sale or public offer.

Venture capitalists prefer later stage investment vis a Vis early stage
investment, as the rate of failure in later stage financing is low. It is because
firms at this stage have a past performance data, track record of management,
established procedures of financial control. The time horizon for realization is
shorter, ranging from 3 to 5 years. This helps the venture capitalists to balance
their own portfolio of investment as it provides a running yield to venture
capitalists. Further the loan component in third stage finance provides tax
advantage and superior return to the investors.

There are four sub divisions of later stage finance:

 Expansion/Development Finance
 Replacement Finance
 Buyout Financing
 Turnaround Finance

Expansion/ Development finance

An enterprise established in a given market increases its profit exponentially by

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

Realization horizon for expansion/development investment is one to three

years. It is favoured by venture capitalist as it offers higher rewards in shorter
period with lower risk. Funds are needed for new or larger factories and
warehouses, production capacities, developing improved or new products,
developing new markets or entering exports by enterprise with established
business that has already achieved break even and has started making profits.

Replacement Finance

It means substituting one shareholder for another, rather than raising new
capital resulting in the change of ownership pattern. Venture capitalist
purchase share from the entrepreneurs and their associates enabling them to
reduce their shareholding in unlisted companies. They also buy dividend
coupon. Later, on sale of the company or its listing on stock exchange, these
are re-converted to ordinary shares. Thus, Venture capitalist makes a capital
gain in a period of 1 to 5 years

Buy-out / Buy-in Financing

It is a resent development and a new form of investment by venture capitalist.

The funds provided to the current operating management to acquire or
purchase a significant share-holding in the business they manage are called
management buyout.

Management Buy-in refers to the funds provided to enable a manager or a

group of managers from outside the company to buy into it.
It is the most popular form of venture capital amongst stage financing. It is less
risky as venture capitalist in invests in solid, ongoing and more mature
business. The funds are provided for acquiring and revitalizing an existing
product line or division of a major business. MBO (Management buyout) has
low risk as enterprise to be bought have existed for some time besides having
positive cash flow to provide regular returns to the venture capitalist, who
structure their investment by judicious combination of debt and equity. Of late
there has been a gradual shift away from start up and early finance towards
MBO opportunities. This shift is because of lower risk than start up
investments.

Turnaround Finance

It is rare form later stage finance which most of the venture capitalist avoid
because of higher degree of risk. When an established enterprise becomes
sick, it needs finance as well as management assistance for a major
restructuring to revitalize growth of profits. Unquoted company at an early
stage of development often has higher debt than equity; its cash flows are
slowing down due to lack of managerial skill and inability to exploit the market
potential. The sick companies at the later stages of development do not
normally have high debt burden but lack competent staff at various levels.
Such enterprises are compelled to relinquish control to new management. The
venture capitalist has to carry out the recovery process using hands on
management in 2 to 5 years. The risk profile and anticipated rewards are akin
to early stage investment.

Bridge Finance
It is the pre-public offering or pre-merger/acquisition finance to a company. It
is the last round of financing before the planned exit. Venture capitalist help in
building a stable and experienced management team that will help the
company in its initial public offer. Most of the time bridge finance helps
improves the valuation of the company. Bridge finance often has a realization
period of 6 months to one year and hence the risk involved is low. The bridge
finance is paid back from the proceeds of the public issue.

 VENTURE CAPITAL INVESTMENT PROCESS

Venture capital investment process is different from normal project financing.

In order to understand the investment process a review of the available
literature on venture capital finance is carried out. Tyebjee and Bruno in 1984
gave model of venture capital investment activity with some variations is
commonly used presently. As per this model this activity is a five step process
as follows:

1. Deal Organization
2. Screening
3. Evaluation or due Diligence
4. Deal Structuring
5. Post Investment Activity and Exit
 Investors

Screening

VC MGT Fund
Selection

Investment
process

Structuring
Prospective
Investee

Monitoring

Exit
  Deal Origination:

In generating a deal flow, the VC investor creates a pipeline of deals or

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

 Screening:

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

 Due Diligence:

Due diligence is the industry jargon for all the activities that are associated
with evaluating an investment proposal. The Venture capitalists evaluate the
quality of entrepreneur before appraising the characteristics of the product,
market or technology. Most venture capitalists ask for a business plan to make
an assessment of the possible risk and return on the venture. Business plan
contains detailed information about the proposed venture. The evaluation of
ventures by VCFs in Indian includes; Preliminary evaluation: the applicant
required to provide a brief profile of the proposed venture to establish prima
facie eligibility.

Detailed evaluation: once the preliminary evaluation is over, the proposal is

evaluated in greater detail. VCFs in India expect the entrepreneur to have: -
integrity, long-term vision, urge to grow, managerial skills, commercial
orientation.

VCFs in India also make the risk analysis of the proposed projects which
includes: product risk, market risk, technological risk and entrepreneurial risk.
The final decision is taken in terms of the expected risk-return trade-off as
shown in figure.

 Deal Structuring:

In this process, the venture capitalist and the venture company negotiate the
terms of the deals, that are the amount form and price of the investment. This
process is termed as deal structuring. The agreement also includes the venture
capitalists right to control the venture company and to change its management
if needed, buyback arrangement specify the entrepreneur’s equity share and
the objectives share and the objectives to be achieved.

 Post Investment Activities:

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

 Exit:

Venture capitalists generally want to cash-out their gains in five to ten years
after the initial investment. They play a positive role in directing the company
towards particular exit routes. A venture may exist in one of the following
ways:

There are four ways for a venture capitalist to exit its investment:

 Initial Public Offer (IPO)

 Acquisition by another company
 Re-purchase of venture capitalists share by the investee company
 Purchase of venture capitalists share by a third party
Promoters Buy-back

The most popular disinvestment route in India is promoters buy-back. This

route is suited to Indian conditions because it keeps the ownership and control
of the promoter intact. The obvious limitation, however, is that in a majority of
cases the market value of the shares of the venture firm would have
appreciated so much after some years that the promoter would to be in a
financial position to buy them back.

In India, the promoters are invariably given the first option to buy back equity
of their enterprise. For example, RCTO participates in the assisted firm’s equity
with suitable agreement for the promoter to repurchase it. Similarly, Confine-
VCF offers an opportunity to the promoters to buy back the shares of the
assisted firm within an agreed period at a predetermined price. If the promoter
fails to buy back the shares within the stipulated period, Confine-VCF would
have the discretion to divest them in any manner it deemed appropriate. SBI
capital Markets ensures through examining the personal assets of the
promoters and their associates, which buy back, would be a feasible option. GV
would make disinvestment, in consultation with the promoter, usually after
the project has settled down, to a profitable level and the entrepreneur is in a
position to avail of finance under conventional schemes of assistance from
banks or other financial institutions.

Initial Public Offers (IPOs)

The benefits of disinvestments via the public issue route are improved
marketability and liquidity, better prospects for capital gains and widely known
status of the venture as well as market control through public share
participation. This option has certain limitations in the Indian context. The
promotion of the public issue would be difficult and expensive since the first-
generation entrepreneurs are not known in the capital markets. Further,
difficulties will be caused if the entrepreneur’s business is perceived to be an
unattractive investment proposition by investors. Also, the emphasis by the
Indian investors on short-term profits and dividends may tend to make the
market price unattractive. Yet another difficulty in India until recently was that
the Controller of Capital Issues (CCI) guidelines for determining the premium
on shares took into account the book value and the cumulative average EPS till
the date of the new issue. This formula failed to give due weight age to the
expected stream of earning of the venture firm. Thus, the formula would
underestimate the premium. The government has now abolished the Capital
Issues Control Act, 1947 and consequently, the office of the controller of
Capital Issues. The existing companies are now free to fix the premium on their
shares. The initial public issue for disinvestments of VCFs holding can involve
high transaction costs because of the inefficiency of the secondary market in a
country like India. Also, this option has become far less feasible for small
ventures on account of the higher listing requirement of the stock exchanges.
In February 1989, the Government of India raised the minimum capital for
listing on the stock exchanges from Rs 10 million to Rs 30 million and the
minimum public offer from Rs 6 million to Rs 18 million.

Sale on the OTC Market

An active secondary capital market provides the necessary impetus to the

success of the venture capital. VCFs should be able to sell their holdings, and
investors should be able to trade shares conveniently and freely. In the USA,
there exist well-developed OTC markets where dealers trade in share on
telephone/terminal and not on an exchange floor. This mechanism enables
new, small companies which are not otherwise eligible to be listed on the stock
exchange, to enlist on the OTC markets and provides liquidity to investors. The
National Association of Securities dealers Automated Quotation System
(NASDAQ) in the USA daily quotes over 8000 stock prices of companies backed
by venture capital.

The OTC Exchange in India was established in June 1992. The Government of
India had approved the creation for the Exchange under the Securities
Contracts (Regulations) Act in 1989. It has been promoted jointly by UTI, ICICI,
SBI Capital Markets, Can Bank Financial Services, GIC, LIC and IDBI. Since this
list of market-makers (who will decide daily prices and appoint dealers for
trading) includes most of the public sector venture financiers, it should pick up
fast, and it should be possible for investors to trade in the securities of new
small and medium size enterprise.

The other disinvestment mechanisms such as the management buy outs or

sale to other venture funds are not considered to be appropriate by VCFs in
India.

The growth of an enterprise follows a life cycle as shown in the diagram below.
The requirements of funds vary with the life cycle stage of the enterprise. Even
before a business plan is prepared the entrepreneur invests his time and
resources in surveying the market, finding and understanding the target
customers and their needs. At the seed stage the entrepreneur continues to
fund the venture with his own fund or family funds. At this stage the funds are
needed to solicit the consultant’s services in formulation of business plans,
meeting potential customers and technology partners. Next the funds would
be required for development of the product/process and producing
prototypes, hiring key people and building up the managerial team. This is
followed by funds for assembling the manufacturing and marketing facilities in
that order. Finally, the funds are needed to expand the business and attaint
the critical mass for profit generation. Venture capitalists cater to the needs of
the entrepreneurs at different stages of their enterprises. Depending upon the
stage they finance, venture capitalists are called angel investors, Venture
capitalist or private equity supplier/investor.

 METHODS OF VENTURE FINANCING

Venture Capital is typically available in three forms in India, they are:

 Equity: All VCFs in India provide equity but generally their contribution
does not exceed 49% of the total equity capital. Thus, the effective
control and majority ownership of the firm remains with the entrepreneur.
They buy shares of an enterprise with an intention to ultimately sell them
off to make capital gains.
 Conditional Loan: it is repayable in the form of a royalty after the
venture is able to generate sales. No interest is paid on such loans. In
India, VCFs change royalty ranging between 2% to 15%; actual rate
depends on other factors of the venture such as gestation period, cost flow
patterns, riskiness and other factors of the enterprise.
 Income Note: it is a hybrid security which combines the features of both
conventional loan and conditional loan. The entrepreneur has to pay both
interest and royalty on sales, but at substantially low rates.
 Participating Debenture: such security carries charges in 3 phases. In
the start up phase, before the venture attains operations to a minimum
level, no interest is charged, after this, low rate of interest is charged, up
 to a particular level of operation. Once the venture is commercial, a high
rate of interest is required to be paid.
 Quasi Equity: quasi equity instruments are converted into equity at a
later date. Convertible instruments are normally converted into equity at
the book value or at certain multiple of EPS, i.e. at a premium to par
value at a later date. The premium automatically rewards the promoter for
their initiative and hand work. Since it is performance related, it
motivates the promoter to work harder so as to minimize dilution of their
control on the company. The different quasi equity instruments are
follows:

o Cumulative convertible preference shares.

o Partially convertible debentures.
o Fully convertible debentures.

 Other Financing methods: a few venture capitalists, particularly in the

private sector, have started introducing innovative financial securities like
participating debentures, introduced by TCFC is an example.

 DIFFERENCE BETWEEN VENTURE CAPITAL AND OTHER

FUNDS (PRIVATE EQUITY)

 Venture Capital Vs Development Funds

Venture capital differs from development funds as latter means putting up of

industries without much consideration of use of new technology or new
entrepreneurial venture but having a focus on underdeveloped areas
(locations). In majority cases it is in the form of loan capital and proportion of
equity is very thin. Development finance is security oriented and liquidity
prone. The criteria for investment are proven track record of company and its
promoters, and sufficient cash generation to provide for returns (principal and
interest). The development bank safeguards its interest through collateral.

They have no say in working of the enterprise except safeguarding their

interest by having a nominee director. They do not play any active role in the
enterprise except ensuring flow of information and proper management
information system, regular board meetings, adherence to statutory
requirements for effective management information system, regular board
meetings, adherence to statutory requirements for effective management
control whereas Venture capitalist remain interested if the overall
management of the project account of high risk involved I the project till its
completion, entering into production and making available proper exit route
for liquidation of the investment. As against this fixed payments in the form of
instalment of principal and interest are to be made to development.

 Venture Capital Vs Seed Capital & Risk Capital

It is difficult to make a distinction between venture capital, seed capital, and

risk capital as the latter two form part of broader meaning of Venture capital.
Difference between them arises on account of application of funds and terms
and conditions applicable. The seed capital and risk funds in India are being
provided basically to arrange promoter’s contribution to the project. The
objective is to provide finance and encourage professionals to become
promoters of industrial projects. The seed capital is provided to conventional
projects on the consideration of low risk and security and use conventional
techniques for appraisal. Seed capital is normally in the form low interest
deferred loan as against equity investment by Venture capital. Unlike Venture
capital, Seed capital providers neither provide any value addition nor
participate in the management of the project. Unlike Venture capital Seed
capital provider is satisfied with low-normal returns and lacks any flexibility in
its approach.

Risk capital is also provided to established companies for adapting for new
technologies. Herein the approach is not business oriented but developmental.
As a result, on one hand the success rate of units assisted by seed capital/risk.

Finance has been lower than those provided with venture capital. On the other
hand, the return to the seed/risk capital financier had been very low as
compared to venture capitalist.

Seed Capital Scheme Venture Capital Scheme

Basic Income or aid Commercial viability
Beneficiaries Very small entrepreneurs Medium and large
entrepreneurs are also covered
Size of assistance Rs. 15 lac(Max) Up to 40 percent of promoters’
equity
Appraisal process Normal Skilled and Specialized
Estimates returns 20 percent 30 percent plus
Flexibility Nil Highly flexible
Value addition Nil Multiple ways
Exit option Sell back to promoters Several, including public offer
Funding sources Owner funds Outside contribution allowed
Syndication Not done Possible
Tax concession Nil Exempted
Success rate Not good Very satisfactory
  Venture Capital Vs Bought Out Deals

The important difference between the venture capital and bought out deals
is that bought outs are not based upon high risk- high reward principal.
Further unlike venture capital they do not provide equity finance at
different stages of the enterprise. However, both have a common
expectation of capital gains yet their objectives and intents are totally
different.

 VENTURE CAPITAL & ALTERNATIVE

FINANCING COMPARISON

Venture capital & alternative financing comparison

If we are struggling to find success in our quest for venture capital, maybe we
are looking in the wrong place. Venture capital is not for everybody. For
starters, venture capitalists tend to be very picky about where they invest. They
are looking for something to dump a lot of money into 9usually no less than $1
million) that will pour even more money right back at them in a short amount of
time (typically 3-7 years). We may be planning for a steady growth rate as
opposed to the booming, overnight success that venture capitalists tend to
gravitate toward. We may not be able to turn around as large of a profit as they
are looking for in quick enough time. We may not need the amount of money
that they offer or our business may simply not be big enough.

Simply put, venture capital is not the right fit for our business and there are
plenty of other options available when it comes to finding capital.

 Substitute in Early stage

o Angels

Most venture capital funds will not consider investing in anything under $1
million to $2 million. Angels, however, are wealthy individuals who will
provide capital for a startup business. These investors have usually earned their
money as entrepreneurs and business managers and can serve as a prime
resource for advice on top of capital. On the other hand, due to typically limited
resources, angels usually have a shorter investment horizon than venture
capitalists and tend to have less tolerance for losses.

o Private Placement

An investment bank or agent may be able to raise equity for our company by
placing our unregistered securities with accredited investors. However, you
should be aware that the fees and expenses associated with this practice are
generally higher than those that come with venture and angel investors. We will
likely receive little or no business counsel from private investors who also tend
to have little tolerance for losses and under-performance.
 o Initial Public Offering

If we are somehow able to gain access to public equity markets than an initial
public offering (IPO) can be an effective way to raise capital. Keep in mind that,
while the public market’s high valuations, abundant capital and liquidity
characteristics make it attractive, the transaction costs are high and there are
ongoing legal expenses associated with public disclosure requirements.

 Later Stage Financing

o Bootstrap Financing

This method is intended to develop a foundation for your business from scratch.
Financial management is essential to make this work. With bootstrap financing
you’re building a business from nothing, which means there is little to no
margin for error in the finance department. Keep a rigid account of all
transactions and don’t stray from your budget.

A few different methods of bootstrapping include:

Factoring, this generates cash flow through the sale of your accounts receivable
to a factor at discounted price forcash.

Trade Credit is an option if you are able to find a vendor or supplier that will
allow you to order goods on net 30, 60- or 90-day terms. If you can sell the
goods before the bill comes due then you have generated cash flow without
spending anymoney. Customers can pay you up front our services.

Leasing,your equipment instead of purchasing it outright.

 o Fund from Operations

Look for ways to tweak your business in order to reduce the cash flowing out
and increase the cash flowing in. Funding found in business operations come
free of finance charges, can reduce future financing charges and can increase the
value of your business. Month-by-month operating and cash projections will
show how well we have planned, how you can optimize the elements of your
business that generate cash and allow you to plan for new investments and
contingencies.

o Licensing

Sell licenses to technology that is non-essential to our company or grant limited

licensing to essential technology that can be shared. Throughout licensing we
can generate revenue from up-front fees, access fees, royalties or milestone
payments.

o Vendor Financing

Similar to the trade credit related to bootstrap financing, vendors can play a big
role in financing your new business. Establish vendor relationships through our
trade association and strike deals to offer their product and pay for it at a date in
the near future. Selling the product in time is up to us. In hopes of keeping you
as a customer, vendors may also be willing to work out an arrangement if we
need to finance equipment or supplies. Just make sure to look for stability when
you research a vendor’s credentials and reputation before you sign any kind of
agreement. And keep in mind that many major suppliers (GE Small Business
Solutions,IBM Global Financing) own financial companies that can help you.
 o Self-Funding

Search between the couch cushions and in old jacket pockets for
whatever extra money you might have lying around and invest it into
your business. Obviously loose change will not be enough for extra
business funding, but take a look at your savings, investment portfolio,
retirement funds and employee buyout options from your previous
employer. You won’t have to deal with any creditors or interest and the
return on your investment could be much higher.

However, make sure that you consider the risks involved with using your own
resources. How competitive is the market that you are about to enter into? How
long will it take to pay you back? Will you be able to pay yourself back? Can
you afford to lose everything that you are investing if your business were to
fail? It’s important that your projected returns are more than enough to cover
the risk that you will be taking.

o SBIR and STTR Programs

Coordinated by the SBA, SBIR (Small Business Innovation Research) and

STTR (Small business Technology Transfer) programs offer competitive federal
funding awards to stimulate technological innovation and provide opportunities
for small businesses. You can learn more about these programs at
SBIRworld.com.

o State Funding

If you’re not having any luck finding funding from the federal government take
a look at what your state has to offer. There is a list of links to state
development agencies that offer an array of grants and financial assistance for
small businessessonsAbout.com..
 o Community Banks

These smaller banks may have fewer products than their financial institution
counterparts but they offer a great opportunity to build banking relationships
and are generally more flexible with payment plans and interest rates.

o Microloans

These types of loans can range from hundreds of dollars to low six-figure
amounts. Although some lenders regard microloans to be a waste of time
because the amount is so low, these can be a real boon for a startup business or
one that just needs to add some extra cash flow.

o Finance Debt

It may be more expensive in the long run than purchasing, but financing your
equipment, facilities and receivables can free up cash in the short term or reduce
the amount of money that you need to raise.

o Friends

Ask your friends if they have any extra money that they would like to invest.
Assure them that you will pay them back with interest or offer those stock
options or a share of the profits in return.

o Family

Maybe you have a rich uncle or a wealthy cousin that would be willing to lend
you some money get your business running or send it to the next level. Again,
make it worth their while by offering interest, stocks or a share of the profits.

o Form a Strategic Alliance

Aligning your business with a corporation can produce funding from upfront or
access fees to your service, milestone payments and royalties. In addition,
corporate partners may be able to provide research funding, loans and equity
investments.

o Sell Some Assets

Find an interested party to buy some of your assets (computers, equipment, real
estate, etc) and then lease them back to you. This provides an instant source of
cash and you will still be able to use whatever assets you need.

o Business Lines of Credit

If your business has positive cash flow and has proven that it will cover its debts
then you may be eligible for a business line of credit. This type of financing is a
common service offered by most business banks and serves as business capital,
up to an agreed upon amount, that you can access at any time.

o Personal Credit Cards

Using personal credit cards to finance a business can be risky but, if you take
the right approach, they can also give your business a lift. You should only
consider using this type of financing for acquiring assets and working capital.
Never consider this to be a long-term option. Once your company breaks even
or moves into the black, ditch the credit cards and move toward traditional bank
financing or lease agreements.

o Business Credit Cards

Business credit cards carry similar risks as personal credit cards but tend to be a
safer alternative. While the activity on this card goes toward your credit report,
 a business credit card can help you to build business credit, keep your business
expenses separate from your personal expenses and can make tax season easier
to manage.

 PLAYERS IN VENTURE CAPITAL INDUSTRY

Idea Established the Expansion Troubleshooting

company

Business Break Investing In IPO Turnaround

concept Even-point technology
Medium
Angle Small Corporate venture
Venture investors funds
Fund

Big Venture Funds + Financial Funds

Players in Venture Capital Industry

There are following group of players:

 Angels and angel clubs

 Venture capital funds
 o Small
o Medium
o Large
 Corporate Venture funds
 Financial service venture groups

 Angels and angel clubs

Angels are wealthy individuals who invest directly into companies. They can
form angel clubs to coordinate and bundle their activities. Beside the money,
angels often provide their personal knowledge, experience and contacts to
support their investees. With average deals sizes from USD100, 000 to USD
500,000 they finance companies in their early stages. Examples for angel clubs
are –Media Club, Dinner Club, and Angels forum

 Small and Upstart Capital Funds

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

o Artemis Comerford
 o Abell Venture Fund
o Acacia Venture Partners

 Medium Venture Funds

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

 Large Venture Funds

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

Examples are:

o AIG American International Group

o Cap Vest man
o 3i
  Corporate Venture Funds

These Venture Capital funds are set up and owned by technology companies.
Their aim is to widen the parent company’s technology base in the win-win-
situation for both, the investor and the investee. In general, corporate funds
invest in growing or maturing companies, often when the investee wishes to
make additional investments in technology or product development. The
average deals size is between USD 2 million and USD 5 million. The large funds
will try to improve their position by mergers and acquisitions with other funds
to improve size, reputation and their financial muscle. In addition, they will to
diversify. Possible areas to enter are other financial services by means of M&As
with financial services corporations and the consulting business. For the latter
one the funds have a rich resource of expertise and contents in house. In a
declining market for their core activity and with lots of tumbling companies out
there is no reason why Venture Capital funds should offer advice and
consulting only to their investees. Examples are:

o Oracle
o Adobe
o Dell
o Kyocera

As an example, Adobe systems launched a $40m venture fund in 1994 to invest

in companies strategic to its core business, such as Cascade Systems Inc and
lantana research Corporation-has been successfully boosting demand for its
core products, so that Adobe recently launched a second $40m fund.

 Financial Funds:
A solution for financial funds could be a shift to a higher saucerization of
Venture Capital activities. That means that the parent companies shift the risk
to their customers by creating new products such as stakes in a Venture Capital
fund. However, the success of such products will depend on the overall climate
and expectations in the economy. As long as the sown turn continues without
any sign of recovery customers might prefer less risky alternatives.

“GLOBAL SCENARIO OF

VENTURE CAPITAL

INDUSTRY”
  OVERVIEW

The global economic downturn has many venture capitalists altering strategies,
including reducing investment levels in the short term, according to the 2009
Global Venture Capital Survey by Deloitte Touché Tohmatsu and the National
Venture Capital Association. Fifty-one percent of the survey respondents are
decreasing the number of companies in which they plan to invest and just 13
percent are increasing this activity.

The 2009 Global Venture Capital survey, which measured the opinions of more
than 750 venture capitalists worldwide, also shines headlights into the post-
recession landscape. The cleantech sector is poised to become the leading
investment category and the globalization of the venture capital industry will
intensify the latter posing significant competitive questions for the United
States and opportunities for emerging markets such as China.

While the recession has slowed the pace of venture investing in the short term,
it may very well have expedited the global evolution of the industry in the long
run, said Mark Jensen, national managing partner of Deloitte LLPs Venture
Capital Services. In recent years, many entrepreneurs who have been educated
in the United States have returned home to start companies in their home
countries. The playing field continues to level out in terms of new innovation
hot spots, broader access to capital and growing regional ecosystems that
foster risk taking and capital formation.
  HISTORY & EVOLUTION

Prior to World War Two, the source of capital for entrepreneurs everywhere
was either the government, government-sponsored institutions meant to
invest in such ventures, or informal investors (today, termed angels) that
usually had some prior relationship to the entrepreneur. In general,
throughout history private banks, quite reasonably, have been unwilling to
lend money to a newly established firm because of the high risk and lack of
collateral. After World War two, in the U.S. a set of intermediaries emerged
who specialized in investing in fledgling firms having the potential for
extremely rapid growth.

Form its earliest beginnings on the U.S. East Coast, venture capital gradually
expanded and became an increasingly professionalized institution. During this
period, the locus of the venture capital industry shifted from New York and
Boston on the east Coast to Silicon Valley on the west coast. By the mid-1980s,
the ideal-typical venture capital firm was based in Silicon Valley and invested
largely in electronics with lesser sums devoted to biomedical technologies.
Until the present, in addition to Silicon Valley, the two other major
concentrations have been Boston and New York City.

In both Europe and Asia, there are significant concentrations of venture capital
in London, Israel, Hong Kong, Taiwan, and Tokyo. In the U.S., the government
has played a role in the development of venture capital, though, for the most
part, it was indirect. The indirect role, i.e., the general policies that also
benefited the development of the venture capital industry, was probably the
most significant. Some of the most important of these were;
  The U.S. government generally practiced sound monetary and fiscal
policies ensuring relatively low inflation with a stable financial
environment and currency.
 U.S. tax policy, though it evolved, has been favorable to capital gains,
and a number of decreases in capital gains taxes may have had some
positive effect on the availability of venture capital.
 With the exception of a short period in the 1970s, U.S. pension funds
have been allowed to invest prudent amounts in venture capital
funds.
 The NASDAQ stock market, which has been the exit strategy of
choice for venture capitalists, was strictly regulated and
characterized by increasing openness thus limiting investor’s fears of
fraud and deception.

This created a general macroeconomic environment of transparency and

predictability, reducing risk for investors. Put differently, environmental risks
stemming from government action were minimized- a shop contrast to most
developing nations.

Another important policy has been a willingness to invest heavily and

continuously in university research. This investment funded generations of
graduate students in the sciences and engineering. From this research has
come trained personal and innovations; U.S. universities particularly, MIT,
Stanford, and UC Berkeley played a particular salient role.

The most important direct U.S. government involvement in encouraging the

growth of venture capital was the passage of the small Business Investment
Act of 1958 authorizing the formation of Small Business Investment
Corporations (SBICs). This legislation created a vehicle for funding small firms
of all types. The legislation was complicated, but for the development of
venture capital the following features were most significant:

 It permitted individuals to from SBICs with private funds as paid-in

capital and then they could borrow money on a 2:1 ratio initially up to
$300,000, i.e., they could use up to $300,000 of SBA-guaranteed money
for their investment of $150,000 in private capital.

 There were also tax and other benefits, such as income and a capital
gains pass through and the allowance of a carried interest as
compensation.

The SBIC program becomes one that many other nations either learned from
or emulated. The SBIC program also provided a vehicle for banks to circumvent
the Depression-era laws prohibiting commercial allowed them to acquire
equity in small firms. This made even more capital available to fledgling firms,
and was a significant source of capital in the 1960s and 1970s. The final
investment format permitted SBICs to raise money in the public market. For
the most part, these public SBICs failed and/or were liquidate by the mid-
1970s. After the mid-1970s, with the exception of the bank SBICs, the SBIC
program was no longer significant for the venture capital industry.

The SBIC program experienced serious problems from its inception. One
problem was that as a government agency it was very bureaucratic having
many rules and regulations that were constantly changing. Despite the
corruption, something valuable also occurred. Namely, and especially, in
Silicon Valley, a number of individuals used their SBICs to leverage their
personal capital, and some were so successful that were able to reimburse the
program and raise institutional money to become formal venture capitalists.
The SBIC program accelerated their capital accumulation, and as important,
government regulations made these new venture capitalists professionalize
their investment activity, which had been informal prior to entering the
program. Now-illustrious firms such as Sutter hill ventures, Institutional
Venture Partners, Bank of America Ventures, and Menlo Ventures began as
SBICs.

The historical record also indicates that government action can harm venture
capital. The most salient example came in 1973 when the U.S. Congress, in
response to widespread corruption in pension funds, changed Federal pension
fund regulations. In their haste to prohibit pension fund abuses, Congress
passed the employment Retirement Income Security Act (ERISA) making
pension fund managers criminally liable for losses incurred in High-risk
investments. This was interpreted to include venture capital funds; as a result,
pension managers shunned venture capital nearly destroying the entire
industry.

This was only reversed after active lobbying by newly created National Venture
Capital Association (NVCA). In 1977, it succeeded in starting a gradual
loosening process that was completed in 1982. The new interpretation of these
pension fund guidelines contributed to first a trickle then a flood of new
money into venture capital funds. The most successful case of the export of
Silicon Valley- style venture capital practice is Israel where the government
played an impotent role in encouraging the growth of venture capital.

The government has a relatively good economic record; there is a minimum of

corruption, massive investment in military, particularly electronics research
and the excellent higher educational system. The importance of the
relationships between Israelis and Jewish individuals in U.S. high-technology
industry and the creation of the Israeli venture capital system should not be
underestimated.

For example, the well-known U.S. venture capitalist, Fred Adler, began
investing in Israeli start-ups in the early 1970s, was involved in forming the first
Israeli venture capital fund. Still the creation of Israeli venture capital industry
would wait until the 1990s, when the government funded an organization
Yozma, to encourage venture capital in Israel.

Yozma received $100 million from the Israeli government. I invested $8 million
in ten funds that were required to raise another $12 million each from “a
significant foreign partner”, presumably an overseas venture capital firm.
Yozma also retained $20 million to invest itself. These “sibling” funds were the
backbone of a now vibrant community that invests in excess of $1 billion in
Israel in 1999 (Pricewaterhouse 2000). In the U.S., venture capital emerged
through an organic trial-and-error process, and the role of the government was
limited and contradictory. In Israel the government played a vital role in a
supportive environment in which private-sector venture capital had already
emerged.

The role of government differs. In the U.S. the most important role of the
government in was indirect, in Israel it was largely positive in assisting the
growth of venture capital, in India the role of the government has had to be
proactive in removing barriers (Dossani and Kenney 2001).

In every nation, the state has played some role in the development of venture
capital. Venture capital is a very sensitive institutional from due to the high-risk
nature of its investments, so the state must be careful to ensure its policies do
not adversely affect its venture capitalists. Put differently, capricious
governmental action injects extra risk into the investment equation. However,
judicious, well planned government policies to create incentives for private
sector involvement have in the appropriate lead to the establishment of what
becomes an independent self-sustaining venture capital industry.

 CURRENT INDUSTRY TRENDS

 Round Class Distribution

The distribution of financing rounds by round class in mature markets is

typically 30-40% in the early stage rounds, 20-25% in second round, and 35-
40% in later rounds. In emerging market like China, the round distribution is
very different as 68% in early stage and 25% in second round. In mature
countries, the investments are made at early start up or product development
phase.

 Industry Shifts

It is perhaps no surprise that contraction is mostly concentrated in information

technology and the business, consumer and retail industries, give the huge
number of companies financed in the technology and Internet boom of 1999-
2000, and the subsequent down turn. The healthcare pool, driven by
investment in biopharmaceuticals and medical devices, has actually grown to
some degree in the different geographies. In United States, the healthcare pool
has grown consistently over the last several years, both in terms of number of
companies and cumulative dollars invested.

Key observations on the pool of private companies by industry:-

o The information and technology pool have declined by just 6% since

2002; particularly due to increasing Interest in WEB 2.0 innovations.

o Since 2003, the cumulative investment has declined in similar amounts.

o The business, consumer and retail category has faced the steepest
declines across the board. In US the number had fallen 54% since 2002
and 54% in Europe since 2003. In Israel; it dropped 67% since 2004.

o The number of healthcare companies has grown in U.S. since 2002 by

27% and the capital risen 30% in last five years. Capital investment to
the pool of healthcare of companies dropped by 95 in Europe since
2003 and 9% in Israel since 2004.

o Clean technology is a small but increasing element of the pool. There

were 262 clean technology companies with a cumulative invested
venture capital of U.S. $38 billion in 2007.

 Mega Trends

Several global mega trends will likely have an impact on venture capital in the
next decade:-

o Beyond the BRICs: - A new wave of fast-growing economies is joining

the global growth leaders like Brazil, China, India And Russia. The
 beginning of venture capital activity has been seen in others countries
such as Indonesia, Korea, Turkey and Vietnam.
o The new multinationals: - A new breed of global company is emerging
from developing countries and redefining industries through low-cost
advantage, modern infrastructure, and vast customer databases in
their home countries. These companies are potential acquirers of
developed market companies at all stagesof growth.
o Globalization of capital: - Changes in economic and financial
landscape are creating significant regional shifts in IPO activity. These
changes have also sparked global consolidation alliances among stock
exchanges.
o Transformation of the CFO’s role and function: - With the
globalization and increasingly complex regulatory environment, CFOs
have a wider range of responsibilities and finance function has been
transformed to face broader mandates.
o Clean Technology: - Clean technology is poised to become the first
break through sector of 21st century. Encompassing energy, air and
water treatment, industrial efficiency improvements, new material
and waste management etc. are playing very vital role globally
because of which VC investors are enjoying rewards.
  GROWTH OF VENTURE CAPITAL IN GLOBAL

Growth of venture capital in global

Clean technology venture investments in North America, Europe, China and

India totaled US$5.6 billion in 557 deals. However, as these figures are
preliminary, the firms expect the final figures could be up by as much as 10%.
"Utilities continue to bring their capital and access to credit to the cleantech
sector and are playing a key role in getting more projects off the ground. In
2009 we saw a surge in utility Power Purchase Agreement (PPA)
announcements with Solar Thermal and Solar PV accounting for 80% of the
total PPAs, while Wind saw increased capacity announcements in the second
half of the year aided by the extension of the production tax credit," said Scott
Smith, U.S. Clean Tech leader for Deloitte. "Additional project financing came
from large corporations whose direct investments in cleantech increased by 14%
in the second half of 2009 compared to the same period in 2008. Leading global
utilities and non-utilities are likely to continue to see cleantech projects as an
attractive investment from an economical and regulatory perspective."

Venture investment was down 33% in 2009, compared to US$8.5 billion in

2008, yet investment in cleantech declined less than other sectors, despite the
economic recession.

The largest deal in all sectors was Solyndra’s US$198 million to expand its
CIGS thin film production. The company has since filed for an IPO.

 2009 GLOBAL VENTURE CAPITAL INDUSTRY SURVEY

The 2009 Global Venture Capital Survey was sponsored by the Global Deloitte
Telecom, Media & Technology (DTT TMT) industry group, in conjunction with
the following venture capital associations throughout the world:

 Brazilian Association of Private Equity & Venture Capital (ABVCAP)

 British Private Equity & Venture Capital Association (BVCA)
 Canadas Venture Capital & Private Equity Association (CVCA)
 European Private Equity & Venture Capital Association (EVCA)
 Emerging Markets Private Equity Association (EMPEA)
  Indian Venture Capital Association (IVCA)
 Israel Venture Association (IVA)
 Latin American Venture Capital Association (LAVCA)
 Malaysian Venture Capital and Private Equity Association (MVCA)
 National Venture Capital Association (NVCA)
 Singapore Venture Capital & Private Equity Association (SVCA)
 Taiwan Private Equity & Venture Capital Association (TVCA)
 Zero2IPO

The survey conducted with venture capitalists (VCs) in the Americas, Asia
pacific (AP), Europe and Israel. There were 725 responses from general
partners of venture capital firm with assets under management ranging from
less than $100 million to greater than $1 billion.

Multiple responses from the same firm were allowed, as the survey was a
general measurement of the state of global investing from all general partners,
not attitudes of specific firm. If respondents did not answer a question, the
count for the question was adjusted accordingly.

The highest number of respondents35 percent claimed assets under

management totalling between $100 million and $499 million. Another 34
percent had managed assets that were less than $100 million, 17 percent had
managed assets greater than $1 billion, and 14 percent had between $500
million and $1 billion in assets under management.
 Series 1, $100-$499
million, 35%

Series 1, $1-$49 Series 1, >$1

million, 18% Series 1, $50-$99
million, 16% Series 1, $500-$1 billion, 17%
billion, 14%

Geographically, the breakdown of responses continues to be fairly representative of

both the size and location of firmsin the venture capital industry around the world.
Forty-four percent of the respondents were from the United States, 21percent from
European countries (excluding the UK), 16 percent from Asia Pacific countries,
10percent from the Americas (excluding the U.S.), 7 percent from the UK, and 2
percentfrom Israel.

Location of
respondents
7%
16%
AP
Europe
Israel
21% The Americas
44%
U.S.
UK
10% 2%
 Column1,
Private Equity
and Venture
Venture Capitl
Capital, 28%,
28%
Private Equity and
Column1, Venture Capital
Venture
Capitl, 72%,
72%

Seventy-two percent of the respondents had a primary investment focus on venture

capital while 28 percent were primarily focused on private equity and venture
capital. And, this year, 52 percent of venture capitalists noted that they are investing
outside of their home country.

Given the severity of the current global recession, this year's survey focused on issues
surrounding its impact on venture capitalists. The survey questions asked how the
global recession is affecting strategy; how future investments are being planned,
both by sector and region; what the anticipated size of the next fund will be and
who VCs think their limited partners will be. We also wanted to know what
countries they believe have the most to gain and lose in this new economy, as well
as what they feel the role of government should be in fostering innovation.

This year's report looks broadly at the results in a global context, but an appendix is
included that breaks out survey responses by geographic regions—the U.S., the
Americas (excluding the U.S.) Europe (excluding the UK), UK, AP and Israel. If you are
interested in responses of investors in a specific region, we encourage you to check
the appendix for those charts.

 CURRENT STRATEGIES FOR NEW GLOBAL ECONOMIC

"The perfect storm" has become the cliché of choice to sum up the global economic
recession of 2008-2009. Certainly, today's economic environment is dramatically
different than the venture capitalists were operating in five years ago when the first
Global Venture Capital Survey was launched. Five years ago, the venture capital
community was recovering from the tech bubble bursting and was just beginning to
see significant move towards the globalization of the venture capital industry.

Today, the economy is in a far different place. But, there are still signs of optimism.
VCs are more attuned to the global economy and we're seeing the maturation of
some sectors specifically semiconductors and telecom while other sectors clean
technologies and life sciences are emerging as areas with great growth potential.
With this shake up in the economy, we are seeing venture capitalists make
adjustments to their investment strategy in order to weather this storm and
establish the foundation to thrive in the future.

"It's been a difficult recession, but the industry is coping and making adjustments,"
said Mark Jensen, U.S. national managing partner of Deloitte and Touche LLP's
Venture Capital Services. "They're moving forward and not sitting on their hands
waiting for something to happen."
In general, VCs are decreasing their overall investing dollars, focusing on their best
companies and increasing their alloca- tion to later-stage investments. "We have not
altered our fundamental strategic focus on early-stage health care investing in
response to the recession," explained Kevin Lalande, managing director of Sante
Ventures. "That said, new market realities and lingering uncertainty have factored
prominently in our decisions about which specific opportunities to pursue of those
consistent with our strategy. In the current environment, we are opting for fewer,
more capital efficient deals in which the existing venture syndicate has enough
reserve capacity to fund a company, if necessary, all the way to cash flow
independence."

Adjusting to a New Reality

In short, the tourists have left, explained Mark Hessen, president of the NVCA.
"Young entrepreneurs who thought they could get rich quickly with just a good idea
are now gone and those now left standing recognize the challenges and tenacity
needed to establish and build a sustainable business," he said. "Those out on the
dustings trying to get funded are much more astute about the globalization of the
economy and worldwide competition. They understand that the value of their
company today is not what it will be six months from now and that if they want to
be funded, it will likely be at a lower valuation than in the past."

Lower valuations could present opportunities for VCs looking for a good deal. But
are they spending? In fact, we see the larger firms eying a bigger slowdown than the
smaller firms. Just more than half of respondents from firms managing $500 million
or more are decreasing their level of investment, compared to about one in three of
those managing $99 million or less.
 Decreasin level of Decreasin level of
Decreasin level of Decreasin level of
Decreasin level of investment, $500-$1 investment, >$1
investment, $1-$49 investment, $100-
investment, $50-$99 Billion, 12% billion, 13%
million, 17% $499 million, 18%
million, 21%

same level of same level of

investment, $500-$1 investment, >$1
same level of Billion, 37% billion, 36%
same level of
same level of investment, $100-
investment, $1-$49
investment, $50-$99 $499 million, 42%
million, 49%
million, 47%

increasing level of increasing level of

increasing level of investment, $500-$1 investment, >$1
increasing level of increasing level of investment, $100- Billion, 51% billion, 51%
investment, $1-$49 investment, $50-$99 $499 million, 40%
million, 34% million, 32%

increasing level of investment same level of investment Decreasin level of investment

Impact of the global recession on investment strategies-level of investment in

terms of capital (by asset under management)

However, the vast majority of firms are maintaining the same strategy when it
comesto industry sector. At least seven out of 10 VCsand the percentage increases
withthe size of the firm plan to maintain the same strategy in terms of industry
sector.
 Changing strategy in Changing strategy in Changing strategy in
Changing strategy in Changing strategy in terms of industry terms of industry terms of industry
terms of industry terms of industry sector, $100-$499 sector, $500-$1 sector, >$1 BILLION,
sector, $1-$49 sector, $50-$99 MILLION, 18% BILLION, 18% 17%
MILLION, 27% MILLION, 26%

Maintaining same Maintaining same Maintaining same

Maintaining same Maintaining same strategy in terms of strategy in terms of strategy in terms of
strategy in terms of strategy in terms of industry sector, $100- industry sector, $500- industry sector, >$1
industry sector, $1- industry sector, $50- $499 MILLION, 82% $1 BILLION, 82% BILLION, 83%
$49 MILLION, 73% $99 MILLION, 74%

Maintaining same strategy in terms of industry sector Changing strategy in terms of industry sector

Impact of the global recession on investment strategies-industry sector (by

assets under management)

"Our firm is interested primarily in potentially great companies that already

havesome revenue traction," said PatrickSheehan, a partner with
EnvironmentalTechnologies Fund. "We're trying to find situations where we
understandcustomerneed, and it's easier to do when there are existing customers.
Our investing style hasn'tchanged with therecession; it's become more appropriate."

What VCs are re-evaluating is the stage in which they're investing. Very few
areshifting to early-stage investing. Instead,about half are maintaining their
currentstrategy and a significant percentage are shifting their focus to later-stage
andexistingportfolio companies. No doubt this is due to both the strain on the
capital markets andthe fact that it's nowtaking longer for companies to be acquired
and rare for them togo public. Investing in later-stage companies shortens the VC's
gestation period andallows them to exit sooner.
"In this environment, it pays to be either a very early-stage investor or a very late-
stageinvestor," said Steve Fredrick, generalpartner of Geotech Ventures. "The classic
Series Bround, where a business is still finding its legs and remaining
capitalrequirements are atbest an estimate, carries more risk given higher burn rates
and the climate's uncertaintyaround future financings. So, we're seeing reduced
investment levels as firms either investsmaller sums in very early-stage companies,
orinvest traditional sums in fewer and muchlater-stage companies. The middle
ground has been largely vacated."
 120%

100% 2%
5% 7% 4%
8%

80%

54%
57%
58% 65% 58%
60%

40%

20% 44%
39%
34% 35%
30%

0%
$1-$49 million $50-$99 million $100-$499 million $500-$1 Billion >$1 billion

Shifting Focus to later-stage companies and existing portfolio companies

Maintaining current strategy in term of stage
Shifting focus to early-stage companies

Impact of the global recession on investment strategies-stage (by assets under

management)

Five years ago, when the first Global Venture Capital Survey was conducted,
theresults indicated some interest in cleantechnologies and the life sciences. This
year,regardless of fund size, we see tremendous interest from VCs in both of
thesesectors,especially clean technologies, where more than six out of 10
respondents anticipatetheir investment levels to increase and another three out of
10 will hold theirinvestments at the same level.
 Increase, Remain the same, Decraese,
Telecommunicatio
Increase,Remain Telecommunicatio
the same, Telecommunicatio
Decraese,
n, 15%Semiconductors,
Semiconductors, n, 56% n, 29%
Semiconductors,
Including Including Including
Increase, Software,
electronics, electronics, Remain
6% 44% the same, electronics, Decraese,
50%
22% New Remain
Increase, Software, 60%
the same, Software,
Decraese, 18%
New
media/social New media/social media/social
Increase, 26% Remain
networking, the same,
networking, Decraese,25%
49% networking,
BiopharmaceuticalsBiopharmaceuticals Biopharmaceuticals
Increase,
, 24% Medical Remain the same,
, 48% Decraese,
, 28% Medical
device and Medical device and device and
equipment, 37% Clean equipment, Remain
51%the same,
equipment,
Increase, Decraese,12%
Clean
Clean technologies,
technologies, 63%
Remain the same, technologies,
Decraese, 6%
Increase, Consumer 32%
Consumer Consumer
business, 24%
business, 51% business, 25%

Increase Remain the same Decraese

In terms of total capital invested, anticipated level of

investment change in select sectors, over the next three
years
Among U.S., UK and Israeli investors, about half expect to increase their investments
in cleantech, while about seven outof 10 AP respondents and European
respondentsexpect their cleantech investments to increase. Two-thirds of respond-
dents from the Americas plan to increase their cleantech investments. This interest
could be becausewe're seeing an increase in government/political support for
cleantech and VCs arelooking more to government participation in both investments
and incentives.
 Remain the same,
Increase, AP, 73% Decrease, AP, 3%
AP, 24%

Increase, Europe, Remain the same,

Decrease, Europe,
71% Europe, 24% 5%

Remain the same,

Increase, Israel, 50%
Israel, 50%

Increase, the Remain the same,Decrease, the

Americas, 66% the Americas, 28%Americas, 7%

Remain the same,

Increase, US, 55% Decrease, US, 7%
US, 38%

Remain the same,

Increase, UK, 50% Decrease, UK, 7%
UK, 43%
Increase Remain the same Decrease

In term of total capital Investment, anticipated level of investment in clean

technologies, over the next three year (by location)

"Governments around the world are very supportive of creating a cleantech industry
with tax credits and incentives," saidHessen. "In the U.S., it's now seen as an
energyindependence issue, a security issue and a jobs issue. And the public ismore
supportive of cleantech activities as more people are cognizant of the threat of
global warming."

But while this finding is significant, it's also important to note that with a couple
ofexceptions where the sectors havesignificantly matured semiconductors
andtelecommunications expect their level of investment in other industries
toremain the same or increase.
Eastern Exposure

Another trend that hasn't changed in the last five years is venture capitalists' interest
inChina and India. Regardless of the size of the firm, investors are intrigued by
theinvestment possibilities of these two countries.

"We are lucky to be sitting at the hub of what we believe will be the most exciting
venture market in the coming yearsChina," said Gavin Ni, founder, president and
CEO of Zero2IPO. "If you take a look at the short-term, you see China will bethe first
toemerge out of the worldwide downturn. China is projecting 7 percent-plus
GDPgrowth in 2009—the highest in the world. Then, looking beyond, you see a
swellingmiddle class but still a minority of the population with money in their
pockets tospend. That does not even scratch the surface of the eventual buying
power of thelargest populationin the world—1.3 billion potential consumers."

Half of all respondents expect their investment levels to increase in Asia

(excludingIndia), while 43 percent expect to increase their investments in India over
the nextthree years. In 2007, 41 percent of respondents indicated an interest in
expandingtheir investment focus in Asia Pacific. About one-third expect to increase
theirinvestment levels in South America. Only 17 percent expect to increase
theirinvestments in North America, the same as 2007.

Compared to North America, the numbers were only slightly better for Europe
andthe UK (25 percent) and Israel (19 percent). More than half of the respondents
dointend to maintain their investment levels in Europe, while 21 percentexpect
those levels to decrease. This investment strategy is a change from 2007, when one-
third ofrespondents indicated that they were interested in expanding their
investment focusin Europe.

Remain the same,

Increse, Asia (excl. Decrease, Asia (excl.
Asia (excl. India),
India), 50% India), 12%
38%
Remain the same,
Increse, Europe and Decrease, Europe
Europe and the UK,
the UK, 25% and the UK, 21%
54%
Increse
Remain the same, Decrease, India,
Increse, India, 43%
India, 47% 11%
Remain the
Remain the same, Decrease, Israel, same
Increse, Israel, 19%
Israel, 62% 19%

Remain the same, Decrease

Increse, Nortgh Decrease, Nortgh
Nortgh America,
America, 17% America, 22%
60%

Increse, South Remain the same, Decrease, South

America, 36% South America, 45% America, 19%

In terms of total capital invested, anticipated level of investment change in

select regions, over the next three year

When it comes to interest in Asia and India, UK respondents are the most
enthusiastic, planning either to increase investment levels (67 percent and 58
percent, respectively) or keep them at the same levels (33 percent and 42 percent,
respectively). But, about nine out of 10 U.S. VCs are also increasing or maintaining
their investments in Asia and India and about the same number of respondents from
Asia Pacific have similar plans.
 Remain the same,
Increase, AP, 61% Decrease, AP, 11%
AP, 29%

Increase, Europe , Remain the same, Decrease, Europe ,

52% Europe , 28% 20%

Decrease, Israel,
Increase, Israel, 67%
33%

Increase, the Remain the same, Decrease, the

Americas, 46% the Americas, 38% Americas, 15%

Remain the same,

Increase, U.S, 40% Decrease, U.S, 11%
U.S, 50%

Remain the same,

Increase, UK, 67%
UK, 33%
Increase Remain the same Decrease

In terms of total capital invested anticipated level of investment change in Asia

Pacific (excl. India). Over the next three years (by location)

Remain the same, AP,

Increase, AP, 57% Decrease, AP, 7%
36%
Increase, Remain the same, Decrease,
Europe(excl.UK), 38% Europe(excl.UK), 48% Europe(excl.UK), 14%
Remain the same,
Decrease, Israel, 17%
Israel, 83% Remain the same,
Increase, The Decrease, The
The
Americas(excl.U.S), Americas(excl.U.S),
Americas(excl.U.S),
46% 23%
Remain31%
the same,
Increase, U.S, 34% Decrease, U.S, 12%
U.S, 55%
Remain the same, UK,
Increase, UK, 58%
42%

Increase Remain the same Decrease

In terms of total capital invested, anticipated level of investment change in

India, over the next three year (by location)

In other words, noted Jensen, "Firms are now looking at the whole world in terms of
their investing priorities. The worldhas gone global in venture capital and the firms
are adapting their strategies accordingly."

David Chao, co-founder and general partner of DCM, agrees. "The lines between
whether a company is American,Asian or European are blurring because by necessity
many start-ups today have multiple offices. Entrepreneurs can startcompanies
anywhere they want in the world and pick locations where conditions are favorable
and talent pools areavailable at reasonable prices."

That perspective is reinforced when you see that investment interest in North
America seems to be decreasing. Only 29 percent of VCs in the Americas (excluding
the U.S.)plan to increase their investments in North American countries while37
percent expect them to remain the same. Twenty-two percent of Israeli investors
plan to increasetheir North Americaninvestments while 33 percent expect
investment levels to remain the same. European investors (excluding the UK)
arelooking at a 16 percent increaseand half expect their investments to remain the
same. Only 15 percent of Asia PacificVCs expect to increase their investment in
North American countries while 40 percentexpect it to remain the same. In the UK,
a mere 14 percent plan on increasing theirinvestments but 48 percent plan on
keeping their levels the same. Even amongU.S. VCs, only 16 percent plan to increase
their North American investing levels while 71 percent expect their investment levels
to stay as they are.
 Remain the same, AP,
Increase, AP, 15% Decrease, AP, 45%
40%

Increase, Remain the same, Decrease,

Europe(excl.UK) , 16% Europe(excl.UK) , 50% Europe(excl.UK) , 34%

Remain the same,

Increase, Israel, 22% Decrease, Israel, 44%
Israel, 33%
Increase, the Remain the same, the Decrease, the
Americas(excl.U.S), Americas(excl.U.S), Americas(excl.U.S),
29% 37% 33%
Remain the same,
Increase, U.S, 16% Decrease, U.S, 13%
U.S, 71%

Remain the same, UK,

Increase, UK, 14% Decrease, UK, 38%
48%
Increase Remain the same Decrease

In term of total capital Invested, anticipated level of investment change in

North America, over the three year (by location)

Why is there so much interest in China and India? China and India are emerging
markets compared to North America, and the U.S. specifically, with great
growthpotential. Also, the strained exit markets in the U.S. and the impact of recent
government policies appear to be discouraging investors from increasing their risk
exposure in North America.
 Remain the same, AP,
Increase, AP, 9% Decrease, AP, 63%
29%

Increase, Remain the same, Decrease,

Europe(excl.UK) , 26% Europe(excl.UK) , 64% Europe(excl.UK) , 10%

Remain the same,

Decrease, Israel, 43%
Israel, 57%

Remain the same, the Decrease, the

Increase, the Americas
Americas (excl.U.S), Americas (excl.U.S),
(excl.U.S), 43%
14% 43%

Remain the same, U.S,

Increase, U.S, 28% Decrease, U.S, 20%
52%

Remain the same, UK,

Increase, UK, 22% Decrease, UK, 20%
57%
Increase Remain the same Decrease

Venture capitalists anticipated level of investment in Europe and the UK, over
the next three years (by location)

At least a quarter of global VCs intend to increase their investments levels in

Europeand the UK. This is mainly driven by VCs in the Americas (excluding the U.S.),
amongwhich 43 percent plan to invest more into Europe and the UK.
However,another 43 percent of the VCs in that same area intend to reduce their
investments in Europe andthe UK. The most positive forecast comes from U.S.
players, among which 28% expectto increase investments, while only 20% foresee
adecrease. Israeli and Asia-Pacific VCs show the least interest in Europe and the UK...

Fund Raising

Despite the fact that the world is struggling with a recession, VCs are remarkably
optimistic about their future funds. MostVCs believe that their next fund will be
either larger than their existing fund or will be approximately the same size. And,
that's acrossthe board, regardless of the size of the venture firm or where they're
located.

Among those managing more than $1 billion, 24 percent project that their next
fund size will increase while almost halfexpect it to remain the same. Less than a
thirdanticipates a decrease. Those numbers are very close when it comes to those
firmsmanaging $500 million to $1 billion. As the size of the firm grows smaller, the
firmsgrow more optimistic about the size of their next fund levels, with 60 percent
of thesmallest those managing $1 million to $49 million— anticipating their fund
levelswill grow and another 28 percent stating that they'll remain the same.

Decrease, $1-$49 Decrease, $50-$99 Decrease, $100-$499

million, 12% million, 13% Decrease, $500-$1
million, 19% Decrease, >$1 billion,
billion, 22%
28%
Remain the Same , Remain the Same ,
$1-$49 million, 28% $50-$99 million, 29% Remain the Same ,
$100-$499 million,
33%
Remain the Same ,
$500-$1 billion, 51% Remain the Same ,
>$1 billion, 48%

Increase, $1-$49 Increase, $50-$99

million, 60% million, 58% Increase, $100-$499
million, 49%
Increase, $500-$1 Increase, >$1 billion,
billion, 27% 24%
Increase Remain the Same Decrease

Projected fund size compared to current fund (by assets under management)

The numbers are far more consistent when you look at this question regionally. Very
little decrease in fund size is projected across the board. And, those projecting
increases or stasis range from the Americas (excluding the U.S.) at 73 percent to the
UK at 87 percent. The region anticipating the greatest increase in their next fund is
Europe (excluding the UK) at 55 percent. Europe (excluding the UK) (15 percent) and
the UK (13 percent) are the regions with the lowest expectations of decreased fund
size in the future.
 Decrease, Decrease, the Decrease, UK, 13%
Decrease, AP, 21% Decrease, Israel, 21%
Europe(excl.UK), 15% Decrease, U.S, 18%
Americas (excl.U.S),
27%
Remain the Same ,
Remain the SameEurope(excl.UK),
, Remain the Same , Remain the Same ,
30%
AP, 30% Remain the Same , the Americas Remain the Same , UK, 44%
Israel, 43% (excl.U.S), 23% U.S, 43%

Increase, Increase, the

Increase, AP, 49%Europe(excl.UK), 55% Americas (excl.U.S),
Increase, Israel, 36% 50% Increase, U.S, 38% Increase, UK, 43%

Increase Remain the Same Decrease

Projected fund size compared to current fund (by location)

Where around the world is this money coming from? Over the next five years, the
vast number of respondents expects that the number of their limited
partnerinvestors located outside their home country or region will remain the
same or increase, again regardless of the size of the firm or their home country. UK
investors, at 97 percent, appear to bethe most eager to engage investors outside of
their home country, but even 92 percent of those VCs responding from Europe
(excluding the UK) project that the number of their limited partners located outside
of their region will remain the same or increase.

Decrease, the
Decrease, Decrease, UK, 4%
Decrease, AP, 15%Europe(excl.UK), 8% Americas (excl.U.S),Decrease, U.S, 5%
Decrease, Israel, 14%
Remain 9%the Same ,
Remain the Same , Remain the Same ,Remain the Same ,
Remain the SameEurope(excl.UK),
, the Americas
32% U.S, 43% UK, 43%
AP, 31% (excl.U.S), 30%
Remain the Same ,
Israel, 64%
Increase, the
Increase,
Americas (excl.U.S),
Increase, AP, 54%Europe(excl.UK), 60% Increase, U.S, 52% Increase, UK, 54%
61%
Increase, Israel, 21%
Increase Remain the Same Decrease

Anticipated number of investors (limited partners) located outside the venture

capitalists home country /region, over the next five years (by location)
There is, however, a disconnection between the optimism these respondents
expressed and where the investment funds willactually come from. We asked
venture capitalists how the current economic crisis will affect the various types of
limitedpartners' willingness to invest over the next three years, and while they plan
to increase the size of their funds and level of investing, they nevertheless see their
traditional investor base—commercial banks, investment banks, corporate operating
funds, insurance companies and public pension funds—to be drying up.

"Limited partners were cutting their venture allocations and number of managers
before this economic period began. Like all good investors, they are tracking results
and culling their herd. While they may have taken more risks in years past to
increase their dollars or number of investments, no doubt the jury is starting to come
in," explained Ray Rothrock, managing general partner at Venrock. "However,
venture is still popular for LPs, if they can find the right groups. I would think they,
like VCs seeking great entrepreneurs everywhere, are seeking great VCs everywhere.
It makes perfect sense."

Among all respondents, 88 percent see commercial bank investors' willingness to

invest in venture capital over the next three years decreasing. Another 87 percent
were just aspessimistic over investment banks. About six out of 10 were not
sanguine aboutcorporate operating funds, insurance companies, corporate venture
capital, and endowments decreasing as limited partners.

Intriguingly, venture capitalists are looking to governments as their financial

partners. More than half of VCs see an increase in governments as willing
investment partners with another fourth looking at an increase by family offices.
 Remain the Same ,
Increase, Commercial Decrease, Commercial
Commercial banks ,
banks , 4% banks , 88%
8%
Increase,
Remain Investment
the Same , Decrease, Investment
Investment
banks ,banks
4% , 8% banks , 87%
Remain the Same ,
Increase, Corporate Decrease, Corporate
Corporate operating
operating funds, 15% operating funds, 63%
funds, 22%
Remain the Same ,
Increase, Corporate Decrease, Corporate
Corporate venture
venture capital, 23% venture capital, 48%
capital, 29%
Increase, Remain the Same , Decrease,
Endowments, 9% Endowments, 32% Endowments, 59%
Increase, Family Remain the Same , Decrease, Family
offices, 23% Family offices, 31% offices, 47%
Increase, Foundations,
Remain the Same , Decrease,
14% Foundations, 30% Foundations, 56%
Increase, Fund of Remain the Same , Decrease, Fund of
funds, 22% Fund of funds, 38% funds, 40%
Increase, Remain the Same , Decrease,
governments, 54% governments, 21% governments, 24%
Remain the Same ,
Increase, Individuals Decrease, Individuals
Individuals and
and families, 19% and families, 57%
Remain thefamilies,
Same , 24%
Increase, Insurance Decrease, Insurance
Insurance companies,
companies, 9% companies, 65%
26%Remain the Same ,
Increase, Private Decrease, Private
Private pension funds,
pension funds, 16% pension funds, 51%
Remain the33%
Same ,
Increase, Public Decrease, Public
Public pension funds,
pension funds, 15% Increase Remain the Same funds,
pension 55%
Decrease
30%

The current economic crisis will affect the following types of limited
partners' willingness to invest in the venture capital asset class, over the
next three years

22% by corporate venture capital, followed by fund of funds. This is significant,

given a tradition of reliance on private capital in the United States. Six out of ten
Asia Pacific respondents also believe there will be an increase in activity on the part
of government. Among Israeli respondents, that number is almost half of
respondents, while two-thirds of those in the Americas (excluding the U.S.), Europe
(excluding the UK) and the UK see government investment increasing.

Of course, these questions were being answered at a very negative point in time
(February-March 2009), and with thefinancial challenges traditional investors are
facing, it's clear that the VC community is increasingly looking to the government for
assistance. But even so, it's unclear how they can assert that their funds will increase
or remain the same when there are fewer limited partners and there's less capital
available.

Winner is

Apparently, among venture capitalists, there's China and there's everyone else. That
was clearly demonstrated in response to earlier questions about where VCs plan to
increase their investments.

It was further validated when VCs were asked directly which country has the most
to gain in overall stature over the next three years. Most respondents from around
the globe chose China either first or second on their lists.

"A question I frequently get is whether China's recent growth in venture investing is
sustainable. I would say, 'of course,'"said Zero2IPO president and CEO, Gavin Ni, "I
interact with China's entrepreneurs every day. There is a real drive to win, and there's
no stopping until the game is won. Others see the victory and want to win, too. And,
the rules of the gamefrom China's government continue to drive strong business
growth."

China was a clear favourite among U.S. investors with 42 percent of respondents
believing that the country has the mostto gain. Only 24 percent held that conviction
for the U.S., followed by 12 percent for India, 5 percent for Brazil and 2 percent for
Russia. Among VC respondents from the Americas (excluding the U.S.), 35 percent
look to Brazil while 18 percent see China being a clear winner, followed by Canada at
16 percent, India at 14 percent and the U.S. trailing at 12 percent. Israeli
respondents selected the U.S. with 36 percent, followed by China (29 percent), Brazil
and Israel (14percent) and India (7 percent). More than half of Asia Pacific
respondents were enthusiastic about China, while 20 percent looked at India as
having the most gain, followed by Japan (6 percent), the U.S. (5 percent) and
Afghanistan (4 percent).

Almost three out of 10 respondents from Europe (excluding the UK) see China as
having the most to gain. Sixteen percent saw that potential from India and the U.S.,
followed by Brazil (7 percent) and France (6 percent). Finally, 35 percent of UK
respondents eyed China as the clear winner, with India following at 24 percent, the
U.S. at 9 percent and the United Arab Emirates at 6 percent.

Column1, China, 42%

Column1, U.S, 24%

Column1, India, 12%

Column1, Brazil, 5%

Column1, Russia , 2%

Top five locations viewed as having the most to gain in terms of overall
economic stature, over the next three years (U.S. respondents)
 Column3, Brazil, 35%

Column3, China, 18%

Column3, Canda,
16%

Column3, India, 14%

Column3, U.S, 12%

Top five locations viewed as having the most to gain in terms of overall
economic stature, over the next three years (the Americas (excl. U.S)
respondents)

On the opposite end of the spectrum, across the board the U.S. consistently was
perceived as having the most to lose ineconomic stature even by more than half of
U.S. respondents. This shouldn't be surprising, given that having createdventure
capital; the U.S. has long had preeminent status. With the rest of the world looking
at the future of the industryand where people will be investing, there's no question
among any respondents that the U.S.'s elevated status cannotcontinue to be taken
for granted, particularly given this new economic environment and the
entrepreneurial ecosystems that are emerging around the world.

 CHINA, INDIA AND ISRAEL WILL BE MOST ATTRACTIVE

GROWTH OF VENTURE CAPITAL

While overall investment levels are expected to be lower, the KPMG survey
found that 2009 funding will be targeted toward key geographic regions and
industry segments. In addition, the KPMG survey found that venture investors
do not see the IPO market improving for at least a year, and only a small portion
of portfolios are poised for exit in 2009.

While overall investment levels are expected to be lower, the KPMG survey
found that 2009 funding will be targeted toward key geographic regions and
industry segments. Respondents indicated that China, India and Israel will be
the most attractive regions for venturecapital, while cleantech, life sciences,
mobile and digital entertainment will remain the hot industries.

‘While overall funding will decrease, venturecapitalists will continue to invest

in those areas they feel will provide the best return on investment,’ said Brian
Hughes, KPMG partner based in Philadelphia and co-leader of its venturecapital
practice. ‘Not surprisingly, they continue to be bullish on emerging markets and
industry sectors, such as cleantech, that project near term growth.’

In polling 270 venturecapitalists, corporate buyers and entrepreneurs, KPMG

found that 73 per cent of respondents expect their firm’s revenue to stay the
same or increase in 2009. In fact, 52 per cent expect revenue growth to increase,
including 37 percent who predict revenue growth in excess of 10 percent. Only
26 per cent see declining revenues in the year ahead.

The outlook on sustained revenue growth is the silver lining to a tough year that
has seen the fewest venture capital portfolio companies go public since 1977. In
fact, the KPMG survey found that venture capitalists expect the negative IPO
trend to continue in 2009, with 88 per cent of respondents expecting IPO
activity to stay the same or to decline further. Additionally, 82 per cent of
venturecapitalists surveyed indicated that they do not anticipate recovery in the
IPO market for at least 12 months. The outlook on IPO activity has clearly
impacted venturecapital exit opportunities, and 80 per cent of respondents said
less than 20 per cent of their portfolio is poised for exit in 2009.
The decline in IPO opportunities coupled with the expected, continued
regression in valuations of venture-backed companies, may influence the
venture capital community to see acquisitions as liquidity and exit
opportunities. When asked about valuation of venture backed companies, 84 per
cent of respondents predicted decreasing valuations, while only six percent see
an increase. With valuations declining, 58 percent of respondents see M&A
increasing next year.

‘There is no question that economic and market conditions have made the
current environment difficult for venture capitalists,’ said Packy Kelly, KPMG
partner based in Silicon Valley and co-leader of its venturecapital practice.
‘These conditions may lead investment firms to focus on the health of existing
portfolio companies and slow the pace of investment. But the
commercialization of products in the clean tech sector probably contributes to a
large degree to the expected growth in revenue of emerging companies.

According to the KPMG survey, the outlook on investment levels and deal
volume for 2009 mirrors the views on IPO activity. In fact, 74 per cent of
respondents expect overall venture investment to decrease and 82 per cent see a
decline in deal volume. While it is uncertain when venture investment will trend
back up, 50 per cent of venturecapitalists surveyed do not expect that up-tick to
occur until the second half of 2009, while 32 per cent predict it will not happen
until 2010 or beyond. Only 18 per cent predict the turnaround in venture
funding will start in the first two quarters of 2009.

While overall investment levels are expected to be lower, the KPMG survey
found that 2009 funding will be targeted toward key geographic regions and
industry segments. Respondents indicated that China, India and Israel will be
the most attractive regions for venturecapital, while clean tech, life sciences,
mobile and digital entertainment will remain the hot industries.‘While overall
funding will decrease, venturecapitalists will continue to invest in those areas
they feel will provide the best return on investment,’ said Brian Hughes, KPMG
partner based in Philadelphia and co-leader of its venturecapital practice. ‘Not
surprisingly, they continue to be bullish on emerging markets and industry
sectors, such as cleantech, that project near term growth.”

Another indication of the current market conditions’ negative impact on the

venture community can be seen in attitudes toward start-up investing. Ninety-
seven per cent of venturecapitalists surveyed said the credit crisis will have an
adverse effect on the availability ofventure financing to start-up companies, and
73 per cent said it will be harder to get debt or lease financing.

 PRIMARY REASONS FOR VENTURE CAPITAL

INVESTORS EXPANDING GLOBALLY

Among the primary reasons VCs around the world are interested in investing
globally is to take advantage of higher quality deal flow- particularly in the
United States, China, parts of Europe, and Israel. This is especially true for non-
U.S. firms. A second reason is the emergence of an entrepreneurial
environment, again and notably in China, but also India. Among U.S. firms, this
latter rationale is the most significant motivation for investing globally. Other
motivators include access to quality entrepreneurs, diversification of industry
and geographic risk and access to foreign markets.
 non US, higher
quality deal flow, 34 US, emergence of global US non US
entereneurialenvi
ronment, 31
global , higher
quality deal flow, 28

global , emergence
of entereneurialenvi
ronment, 22
non US,
US, higher quality
diversification of
deal flow, 19 non US, emergenceindustry and
global ,
of entereneurialenvi
geographic non US, access to
diversification of risk, 17
ronment, 16 foreign markets, 16
industry and global , access to
global non
, access
US, to
access to
geographic risk,foreign
14 ofmarkets, 14
US, diversification
US,quality
accessquality
to quality US, access to foreign
entrepreneure,
entrepreneure, 12 12 12
entrepreneure, industry and markets, 12
geographic risk, 11
US, lower costsUS, extensive
global , extensive
locations,competition
9 for deal
competition
flow in forlocal
our deal
non US, extensive
global , lower costs
flowmarket,
in our local
6
competition for deal
locations, 5 market, 5
flow in our local
non US, lower costs
market, 3
locations, 2

Primary reasons why investors expanding globally venture

Above chart reveals that 19% U.S. respondents are expand globally for
generating high quality deal flow. And 31% believe that expand globally for
getting benefit of emergence of entrepreneurial environment. Whit 17%
respondents of non U.S are expanding globally for diversification of industry
and geographic risk. All respondents are least concerned about low cost of
locations.

 INVESTING GLOBALLY BY INVESTING LOCALLY

One way to build a comfort zone for global investing and to take advantage of
opportunities abroad is to invest locally in companies with operations outside their
home country, as opposed to investing directly in foreign countries. This year, there
was a significant increase in the number of respondents who indicated that a
sizeable number of their portfolio companies have a considerable amount of
operations outside the country in which they are headquartered.

A significant number, 88 percent of U.S. respondents and 82 percent of non-U.S.

respondents, indicated that at least some portion of their portfolio has significant
operations outside of the country of headquarters. Again, moderation is evident as
more than half of those indicated that less than 25 percent of their portfolio had
significant foreign operations. Nonetheless, these numbers have increased
significantly from prior years and reflect an increased trend in this method of
investment.

GlobalU.S.,
Non-
, 1-10%,
1-10%,
U.S.,
321-10%,
32 32
U.S., 11-25%, 30

Global , 11-25%, 25
Non- U.S., 11-25%,
21
Non- U.S., 0%, 18 U.S., 26-50%, 18
Global , 26-50%, 1726-50%,
Non- U.S.,
Global , 0%, 15 15
Non- U.S., 51-75%,
U.S., 0%, 12 12
Global , 51-75%, 9

U.S., 51-75%, 5
Non- U.S., 76-100%,
U.S., 76-100%, 3
Global , 76-100%,
2 2
Global U.S. Non- U.S.

Percentage of venture capital firms portfolio companies that give significant

operation outside the country

Globally and among U.S. respondents, China has become the primary choice for
relocating manufacturing operations, while India is the primary choice For R&D
operations. Engineering operations tend to land in India as well, but China is also a
popular location. For back office activities, again the choice is India. However, for
non-U.S. respondents, the United States is the primary choice for R&D and
engineering while European respondents preferred Central and Eastern Europe for
manufacturing R&D and Engineering.

One reason why this approach is taking off is that investors are concerned about
intellectual property and liquidity events and in general they feel a need to be closer
to top management. This also reflects a new reality from day one companies that
reflect a larger global entrepreneurial sector. This strategy allows the portfolio
companies (and investors) to take advantage of cost saving and access o talent in
foreign markets while protecting intellectual property. There are however concerns
that such a trend could result in the U.S. losing its R&D edge.

 IMPEDIMENTS TO GLOBAL INVESTING

For all the benefits of overseas investing, VC firms encounter a variety of risks and
challenges abroad. Both U.S. firms and non-U.S. firms perceive the U.S as the
country where the cost of complying with regulation is too high. In fact, the
percentage of non-U.S. respondents who indicated this as a concern leaped from
28% last year to 41% this year. Globally, 4% more, 44% saw this issue as a concern.
46% of U.S. respondents believe the cost of complying with corporate governance is
too high.
 US, U.S, 46
Global, U.S, 44
Non US, U.S, 41
Global US Non US

Global, Global,
NonAustria,
US, Austria,
NonUK & UK
US, Ireland,
& Ireland,
US, UK8& Ireland,
US, Canada,
9 9 US, Austria,
Germany,
Germany, Germany,
Swizerland,
Swizerland, US, Nordic countries,
NonFrance,
US, France,
Global,
7 Canada, 7US, India, 7 Global,
6NonGlobal,
Nordic Itally,Itally,
Non US,Global,
Canada,India,
5 5Swizerland,
5 Non
5 Global, US,
5 Israel, US,
Israel,
Global,
4
China,
5
China, 4 5US, Nordic
Non US,
4 Benelux, 5
Non US, India, 2 US, Israel, 3Non US, countries,
China, 3 US,
3 France,
countries, Itally,
23Global,
US, Benelux,
3
Benelux, 3
2

Top markets where the cost of complying with corporate governance

regulation too high

From the above chart we can see that most of the respondents believe that U.S. has
high cost of complying with Corporate Governance regulation and China, India,
Israel and Canada cost of complying with corporate governance regulation too high.
VENTURE
CAPITAL IN
INDIA
  EVOLUTION OF VENTURE CAPITAL INDUSTRY IN INDIA

The first major analysis on risk capital for India was reported in 1983. It
indicated that new companies often confront serious barriers to entry into
capital market for raising equity finance which undermines their future
prospects of expansion and diversification. It also indicated that on the whole
there is a need to review the equity cult among the masses by ensuring
competitive return on equity investment. This brought out the institutional
inadequacies with respect to the evolution of venture capital.

In India, the Industrial Finance Corporation of India (IFCO) initiated the idea of
Venture Capital when it established the Risk Capital Foundation in 1975 to
provide seed capital to small and risky projects. However the concept of
venture capital financing got statutory recognition for the first time in the fiscal
budget for the year 1986-87.

The venture Capital companies operating at present can be divided into four
groups:

 Promoted by All-India Development Financial Institutions

 Promoted by State Level Financial Institutions
 Promoted by Commercial Banks
 Private Venture Capitalists.

 Promoted by all India Development Financial Institutions

The IDBI started a Venture Capital in 1976 as per the long term fiscal policy of
government of India, with an initial of Rs. 10 Cr. which raised by imposing a
chess of 5% on all payment made for the import of technology know-how
projects requiring funds from Rs.5 Lacks to Rs.2.5Cr. Were considered for
financing. Promoter’s contribution ranged from this fund was available at a
concessional interest rate of 9% (during gestation period) which could be
increased at later stages.

The ICICI provided the required impetus to Venture Capital activities in India,
1986 it started providing venture Capital finance in 1998 it promoted, along
with the Unit trust of India (UTI) Technology Development and information
Company of India (TDICI) as first venture Capital company registered under the
companies act, 1956. The TDICI may provide financial assistance to venture
capital undertaking which are set up by technocrat entrepreneurs, or
technology information and guidance services.

The risk capital foundation established by the industrial finance corporation of

India (IFCI) in 1975, was converted in 1988 into the Risk Capital and Technology
Finance Company (RCTC) as a subsidiary company of the IFCI the rate provides
assistance in the form of conventional loans, interest free conditional loans on
profit and risk sharing basis or equity participation in extends financial support
to high technology projects for technological up gradations. The RCTC has been
renamed as IFCI Venture Capital Funds Ltd. (IVCF)

 Promoted by State Level Financial Institutions

In India, the State Level Financial Institutions in some states such as Madhya
Pradesh, Gujarat, Uttar prades, etc., have done an excellent job and have
provided venture capital to a small scale enterprise. Several successful
entrepreneurs have been the beneficiaries of the liberal funding environment.
In 1990, the Gujarat Industrial Investment Corporation, promoted the Gujarat
Venture Financial Ltd (GVFL) along with other promoters such as the IDBI, the
World Bank, etc., the GVFL provides financial assistance to business in the form
of equity, conditional loans or income notes for technologies development and
innovative products. It also provides finance assistance to entrepreneurs.

The government of Andhra Pradesh has also promoted the Andhra Pradesh
Industrial Development Corporation (APIDC) venture capital ltd. to provide
venture capital financing in Andhra Pradesh.

 Promoted by Commercial Banks

Canbank Venture Capital Fund, State bank Venture Capital Fund and Grindlays
bank Venture Capital Fund have been set up the respective commercial banks
to undertake venture capital activities.

The State bank Venture Capital funds provides financial assistance for bought
out deal as well as new companies in the form of equity which it disinvests
after the commercialization of the project.

Canbank Venture Capital Funds provides financial assistance for proven but yet
to be commercially exploited technologies. It provides assistance both in the
form of equity and conditional loans.

 Private venture Capital Funds

Several private sector venture capital funds have been established in India
such as the 20thCenture Venture Capital Company, Indus venture capital Funds,
Infrastructure Leasing and financial Services Ltd.

Some of the companies that have received funding through this route include:

o Mastek, one of the oldest software house in India

 o Ruskan software, Pune based software consultancy
o SQL Star, Hyderabad based training and software development
consultancy
o Satyam Infoway, the first private ISP in India
o Hinditrom, makers of embedded software
o Selectia, provider of interaction software selectior
o Yantra, ITL Infosy’s US subsidiary, solution for supply chain management
o Rediff on the Net, India website featuring electronic shopping, news,
chat etc.

 OBJECTIVE AND VISION FOR VENTURE CAPITAL IN

INDIA

Venture capitalists finance innovation and ideas which have potential for high
growth but with inherent uncertainties. This makes it a high-risk, high return
investment. Apart from finance, venture capitalists provide networking,
management and marketing support as well. In the broadest sense, therefore,
venture capital connotes financial as well as human capital. In the global
venture capital industry, investors and investee firms work together closely in
an enabling environment that allows entrepreneurs to focus on value creating
ideas and allows venture capitalists to drive the industry through ownership of
the levers of control, in return for the provision of capital, skills, information
and complementary resources. This very blend of risk financing and hand
holding of entrepreneurs by venture capitalists creates an environment
particularly suitable for knowledge and technology based enterprises.

Scientific, technology and knowledge based ideas properly supported by

venture capital can be propelled into a powerful engine of economic growth and
wealth creation in a sustainable manner. In various developed and developing
economies venture capital has played a significant developmental role. India,
along with Israel, Taiwan and the United States, is recognized for its globally
competitive high technology and human capital. India has the second largest
English speaking scientific and technical manpower in the world.

The Indian software sector crossed the Rs 100 billion mark turnover during
1998. The sector grew 58% on a year to year basis and exports accounted for Rs
65.3 billion while the domestic market accounted for Rs 35.1 billion. Exports
grew by 67% in rupee terms and 55% in US dollar terms. The strength of
software professionals grew by 14% in 1997 and has crossed 1, 60000. The
global software sector is expected to grow at 12% to 15% per annum for the
next 5 to 7 years.
Recently, there has also been greater visibility of Indian companies in the US.

Given such vast potential not only in IT and software but also in the field of
service industries, biotechnology, telecommunications, media and
entertainment, medical and health services and other technology based
manufacturing and product development, venture capital industry can play a
catalytic role to put India on the world map as a success story.

 VENTURE CAPITAL INDUSTRY LIFE CYCLE IN INDIA

From the industry life cycle we can know in which stage venture capital are
standing. On the basis of this management can make future strategies of their
business.
 Introduction Growth

2000 2001 2002 20032004 2005 2006

2007 2008 2009
The growth of venture capital in India has four separate phases:

 Phase I- formation of TDICI in 80’s and regional funds as GVFL & APIDC in
early 90s.

The first origin of modern venture capital in India can be traced to the setting
up of a technology Development Funds in the year 1987-88, though the levy of
access on all technology import payment. Technology development fund was
stated to provide financial support to innovative and high risk technological
programmers through the Industrial development bank of India.

The first phase was the initial phase in which the concept of venture capital got
wider acceptance. The first period did not really experience any substantial
growth of venture capitals. The 1980’s were marked by an increasing
disillusionment with the trajectory of the economic system and a belief that
liberalization was needed. The liberalization process started in 1985 in a
limited way. The concept of venture capital received official recognition in
1988 with the announcement of the venture capital guidelines.
During 1988 to 1992 about 9 venture capital institutions came up in India.
Though the venture capital funds should operate as open entities, Government
of India controlled them rigidly. One of the major forces that induced
Government of India to start venture funding was the World Bank. The initial
funding has been provided by World Bank. The most important feature of the
1988 rules was that venture capital funds received the benefit of a relatively
low capital gains tax rate which was lower than the corporate rate. The 1988
guidelines stipulated venture capital funding firms should meet the following
criteria:

o Technology involved should be new, relatively untried, very closely

held, in the process of being taken from pilot to commercial stage or
incorporate some significant improvement over the existing ones in
India.
o Promoters/entrepreneurs using the technology should be relatively
new, professionally or technically qualified, with inadequate resources
to finance the project.

Between 1988 and 1994 about 11venture capital funds became operational
either through reorganizing the business or through new entities.

All these followed the Government of India guidelines for venture capital
activities and have primarily supported technology oriented innovative
business started by first generation entrepreneurs. Most of these were
operated more like a financing operation. The main feature of this phase was
that the concept got accepted. Venture capitals become operational in India
before the liberalization process started. The context was not fully ripe for
growth of venture capitals. Till 1995 the venture capital operated like any bank
but provided funds without collateral. The first stage of the venture capital
industry in India was plagued by in experienced management, mandates to
invest in certain states and sectors and general regulatory problems. Many
public issue by small and medium companies have shown that the Indian
investor is becoming increasingly wary of investing in the projects of new and
unknown promoters.

The liberation of the economy and toning up of the capital market changed the
economic landscape. The decisions relating to issue of stocks and shares was
handled by an office namely: Controller of capital issues (CCI). According to
1988 venture capital guideline, any organization requiring starting venture
funds have to forward an application to CCI. Subsequent to the liberalization of
the economy in 1991, the office of CCI was abolished in May 1992 and the
powers were vested in Securities and Exchange Board of India (SEBI). The
Securities and Exchange Board of India Act, 1992 empower SEBI under section
11(2) thereof to register and regulate the working of venture capital funds.
This was done in 1996, through a government notification. The power to
control venture funds has been given to SEBI only in 1995 and the notification
came out in 1996. Till this time venture funds were dominated by Indian firms.
The new regulations became the harbinger of the second phase of the venture
capital growth.

 Phase II- Entry of Foreign Venture Capital Funds (VCF) between 1995-
1999

The second phase of venture capital growth attracted many foreign

institutional investors. During this period overseas and private domestic
venture capitalists began investing in VCF. The new regulations in 1996 helped
in this. Though the changes proposed in 1996 had a salutary effect, the
development of venture capital continued to be inhibited because of the
regulatory regime and restricted the FDI environment. To facilitate the growth
of venture funds, SEBI appointed a committee to recommend the changes
needed in the venture capital funding context. This coincided with the IT boom
as well as the success of Silicon Valley startups. In other words, venture capital
growth and IT growth co-evolved in India.

 Phase III-(2000 onwards)- Venture capital becomes risk averse and

activity declines:

Not surprisingly, the investing in India came “crashing down” when NASDAQ
lost 60% of its value during the second quarter of 2000 and public markets
(including those in India) also declined substantially. Consequently, during
2001-2003, the venture capitals started investing less money and in money and
in more mature companies in an effort to minimize the risks. This decline
broadly continued until 2003.

 Phase IV- (2004 onward)- Global venture capitals firms actively investing
in India

Since India’s economy has been growing at 7%-8% a year, and since some
sectors, including the services sector and the high end manufacturing sector,
have been growing at 12%-14% a year investors renewed their interest and
started investing again in 2004 the number of deals and the total dollars
invested in India has been increasing substantially.

 GROWTH OF VENTURE CAPITAL IN INDIA

 Growth of Venture Capital in India

The venture capital is growing 43% CAGR. However, in spite of the venture
capital scenario improving, several specific Venture Capital funds are setting up
shop in India, with the year 2007 having been a landmark year for venture
capital in India. The no of deals are increasing year by year. The no of deal in
2003 only 56 and now in 2007 it touch the 387 deals. The introduction stage of
venture capital industry in India is completed in 2003 after that growing stage
of India venture capital industry is starrted.

Tere are 160 venture capital firms/funds in India. In 2006 it is only but in 2007
the number of venture capital firms are 146. The reason is good position of
capital market. But in 2008 no of venture capital firms increase by only 14 the
reason is crashdown of capital market by 51%. The no of venture capital funds
are increasing year by year

2000 2001 2002 2003 2004 2005 2006 2007 2008

81 77 78 81 86 89 105 146 160
 NO. OF VC FIRMS IN INDIA

Series1, 2008, 160

Series1, 2007, 146
NO. OF VC FIRMS

Series1, 2006, 105

Series1,
Series1, 2004, 86 2005, 89
Series1, 2000, 81 2001,
Series1, Series1, Series1,
77 2002, 78 2003, 81

YEARS

Venture capital growth and industrial clustering have a strong positive

correlation. Foreign diect investment, starting of R&D centres, availability of
venture capital and growth of entreneurial firms are getting concentrated into
five clusters. The cost of mnitoring and the cost of skill acquisition are lower in
clusters, especially for innovation. Entry costs are also lower in clusters.
Cerating enetrepreneursship and stimulating innovation in clusters have to
become a major concern of public policy makers. This is essential becouse only
when the cultural context is conductive for risk management venture capital
will take-of. Clusters support innovation and facilitates risk bearing. Venture
capital prefer clusters because the information costs are lower. Policies for
promoting dispersion of industries are becoming redundant after the economic
liberalization.

The venture capital firm invest their money in most developning sectors like
health care, IT-ITes, Telecom, Bio-technology, Media & Entretainment,
shipping & ligistics etc.
 Total investment
Total investment
Total investment US$14.2BN, Others,
US$14.2BN, Shipping Total investment
1284, 9% US$14.2BN, IT & ITES
& Logistics, 685, 5%
, 988, 7%
Total
investment
US$14.2BN,
Energy,
1101, 8%
Total investment
US$14.2BN, BFSI,
3979, 28%

Total investment
US$14.2BN,
Healtcare &
Lifesciences, 478, 3%

Total investment
US$14.2BN, Eng & Total investment
constrution, 1628, US$14.2BN, Media &
11% Total investment Entertinment, 615,
IT & ITES BFSI Healtcare & Lifesciences
US$14.2BN, Telecom, 4%
Total investmentMedia & Entertinment Telecom 1839, 13% Manufacturing
US$14.2BN,
Manufacturing,Eng & constrution Energy Shipping & Logistics
1638, 12% Others

Total sector wise venture capital investment

Now venture capital is nascent stage in India. Now due to growth of sector, the
venture capital industry is also growing. The top most players in the industries
are ICICI venture capital fund, IT&FS venture capital fund, Canbank.

 2009 VENTURE CAPITAL INVESTMENT IN INDIA

Venture Capital firms invested $475 million in 92 deals during 2009, down
from the $836 million invested across 153 deals in the previous year, according
to a study by Venture Intelligence and Global-India Venture Capital
Association.

Venture capital firms, however, began to increase the pace of their investments
in Indian companies in the October-December quarter, making 42 investments
worth $265 million, compared to 23 investments worth $102 million in the
comparative period a year earlier, the study said.

"The strong recovery in investment activity in the last quarter of 2009, as well
the rising interest among global investors towards emerging markets like India,
is quite encouraging for the growth of the sector," Sudhir Sethi, director of the
Global-India Venture Capital Association, said in a statement.

"During 2010, we expect significant follow-on investments into companies that

raised Series a round (first round) in the past two to three years as well as a rise
in exit activity as the global economic recovery gathers pace," he added.

The information technology and IT-enabled services industry retained its status
as the favorite among venture capital investors during 2009, but the industry's
share declined to about 43% of total investments from about 55% in 2008.Other
industries that attracted significant investor attention during the period included
financial services, healthcare and life sciences, and alternative energy.Within IT
and IT-enabled services, online services companies retained their status as the
favorite sector, accounting for about 39% of the investments during 2009.

Investment in Area, Chart Title

East India (12% in
the total value),
10%, 10%
Investment in Area,
North India (12% in
the total value),
15%, 15% Investment in Area,
South India (47% in
Investment in Area,
the total value),
Western India (29%
50%, 50%
in the total value),
25%, 25%

South India (47% in the total value) Western India (29% in the total value)
North India (12% in the total value) East India (12% in the total value)
Companies based in south India accounted for 50% of all venture capital
investments (47% by value) during 2009. Their peers in western India
accounted for 25% of the pie (29% by value) while companies in north India
accounted for 15% of the investments (12% by value).

Among cities, companies headquartered in Bangalore and Mumbai were the

favorites among venture capital investors during 2009, with the former
attracting 29 investments and the latter 15. The Delhi National Capital Region
accounted for 11 investments, followed by Hyderabad with 9 investments.

 NEED FOR GROWTH OF VENTURE CAPITAL IN

INDIA

People in developing countries arepoor in part because they have farless

capitalthan people in industrialcountries. Because of this shortage,workers
have little in the way ofspecialized machinery and equipment,and firms lack
money to obtain moreequipment. As a result, productivity ofworkers in
developing countries is lowcompared with that of workers inindustrial
countries. Financial-resourceflowsfrom industrial to developingcountries are
an obvious means toovercome this inequality. But financialresources are not
enough. Somedeveloping countries have naturalresources such as oil or
minerals that,when sold on world markets, haveprovided large amounts of
money. Inmany cases the money has failed tostimulate sustained economic
growthor increased productivity and incomefor the average person. In part,
failureto use capital productively results fromthe way these resources flow. In
somecountries the government gets themoney, which it uses to
perpetuateitself through military spending or through increased
consumptionspending. In other cases, resourcesflow to wealthy individuals
who usethem to maintain high levels ofconspicuous consumption.

India is still developing country. In India, a revolution is ushering in a new

economy, wherein entrepreneurs mind set is taking a shift from risk adverse
business to investment in new ideas which involve high risk. The conventional
industrial finance in India is not of much help to these new emerging
enterprises. Therefore there is a need of financing mechanism that will fit with
the requirement of entrepreneurs and thus it needs venture capital industry to
grow in India.

Few reasons for which active Venture Capital Industry is important for India
include:

 Innovation: Needs risk capital in a largely regulated, conservation, legacy

financial system
 Job Creation: large pool of skilled graduates in the first and second tier
cities
 Patient capital: Not flighty, unlike FIIs
 Creating new Industry Clusters: Media, Retail, Call Centers and back
office processing, trickling down to organized effort of support services like
Office services, Catering, Transportation.

 REGULATORY AND LEGAL FRAMEWORK

At present, the Venture Capital activity in India comes under the purview of
different sets of regulations namely:
  The SEBI (Venture Capital Funds) Regulation, 1996[Regulations]
lays down the overall regulatory framework for registration and
operations of venture capital funds in India.
 The Indian Trust Act, 1882 or the company Act, 1956 depending on
whether the fund is set up as a trust or a company.
 The foreign investment Promotion Board (FIPB) and the RBI in case of
an offshore fund. These funds have to secure the permission of the
FIPB while setting up in India and need a clearance from the RBI for
any repatriation of income.
 The Central Board of Direct Taxation (CBDT) governs the issues
pertaining to income tax on the proceed from VC funding activity.
The long term capital gain tax is at around 10% in India and the
relevant clauses to VC may be found in Section 10(sub section 23)
 Overseas venture capital investments are subject to the Government of
India Guidelines for Overseas Venture Capital Investment in India
dated September 20, 1995.
 For tax exemptions purposes venture capital funds also needs to
comply with the Income Tax Rules made under Section 10(23FA) of
the Income Tax Act.

 MAJOR REGULATORY FRAMEWORKS FOR

VENTURE CAPITAL INDUSTRY

VC & FVCI
 SEBI RBI FIPB TAX

 SEBI (VCF) Reg. 1996  FEMA, 1999  FDI policy  IT Act, 1961
 SEBI(FVCI) Reg.2000  Transfer or issue  Investment  DTAA
 SCR Act.1956 of security by a approvals  Singapore
 SEBI(SAST) Reg.1997 person resident  Press Notes  Mauritius
 SEBI(DIP)Guidelines,2000 outside India  Others
 SEBI Act,1992 regulation 2000

Major Regulatory frameworks for venture capital industry

In addition to the above, offshore funds also require FIPB/RBI approval for
investment in domestic funds as well as in Venture Capital Undertakings (VCU).
Domestic funds with offshore contributions also require RBI approval for the
pricing of securities to be purchased in VCU likewise, at the time of
disinvestment, RBI approval is required for the pricing of the securities.

Definition of venture capital fund: The Venture Capital Fund is now defined s
a fund established in the form of a Trust, a company including a body corporate
and registered with SEBI which:

 Has a dedicated pool of capital;

 Raised in the manner specified under the regulations; and
 To invest in venture capital undertaking in accordance with the
regulation.
Definition of Venture Capital Undertaking: Venture Capital Undertaking
means a domestic company:-

 Whose share are not listed on a recognized stock exchange in India

 Which is engaged in business including such activities or sectors which
are specified in the negative list by the Board with the approval of the
Central Government by notification in the Official Gazette in this behalf?
The negative list includes real estate, non-banking financial services, gold
financing, activities not permitted under the Industrial Policy of the
Government of India.

Minimum contribution and fund size: the minimum investment in a Venture

Capital Fund from any investor will not be less than Rs.5 lacks and the
minimum corpus of the fund before the fund can start activities shall be at least
Rs.5 corers.

Investment Criteria: The earlier investment criterion has been substituted by

new investment criteria which has the following requirements:

 Disclosure of investment strategy;

 Maximum investment in single venture capital undertaking not to exceed
25% of the corpus of the fund;
 Investment in the associated companies not permitted;
 At least 75% of the investible funds to be invested in unlisted equity
shares or equity linked instruments;
 Not more than 25% of the investible funds may be invested by way of;
o Subscription to initial public offer of a venture capital undertaking
whose shares are proposed to be listed subject to lack in period of
one year;
 o Debt or debt instrument of a venture capital undertaking in which
the venture capital funds has already made an investment by way
of equity.

It has also been provided that Venture Capital Fund seeking to avail benefit
under the relevant provisions of the Income Tax Act will be required to divest
from the investment within a period of one year from the listing of the Venture
Capital Undertaking.

Disclosure and Information to Investors: in order to simplify and expedite the

process of fund raising, the requirement of filing the Placement memorandum
with SEBI is dispensed with and instead the fund will be required to submit a
copy of Placement Memorandum/ copy of contribution agreement entered to
with the investors along with the details of the fund raiser for information to
SEBI. Further, the contents of the Placement Memorandum are strengthened to
provide adequate disclosure and information to investors. SEBI will also
prescribe suitable reporting requirement from the fund on their investment
activity.

QIB status for Venture Capital funds: the venture capital funds will be
eligible to participate in the IPO through book building route as qualified
Institutional Buyer subject to compliance with the SEBI (Venture Capital Fund)
Regulations.

Relaxation in Takeover Code: the acquisition of share by the company or any

of the promoters from the Venture Capital Funds under the terms of agreement
shall be treated on the same footing as that of acquisition of shares by
promoters/companies from the state level financial institutions and shall be
exempt from making an open offer to other shareholders.
Investment by Mutual Funds in Venture capital Funds: in order to increase
the resources for domestic venture capital funds, Mutual Funds are permitted to
invest up to 5% of its corpus in the case of open ended schemes and up to 10%
of its corpus in the case of close ended schemes. A part from raising the
resources for Venture Capital Funds this would provide an opportunity to small
investors to participate in venture capital activities through Mutual funds.

Government of India Guidelines:the Government of India (MOF) Guidelines

for Overseas Venture Capital Investment in India dated September20, 1995 will
be repealed by the MOF on notification of SEBI Venture Capital Fund
Regulations.

The following will be the salient features of SEBI (foreign Venture Capital
Investors) Regulations, 2000:

Definition of Foreign Venture capital Investor: any entity incorporated and

established outside India and proposes to make investment in Venture Capital
Fund or Venture Capital Undertaking and registered with SEBI.

Eligibility Criteria: entity incorporated and established outside India in the

form of Investment Company, Trust, Partnership, Pension Fund, Mutual Fund,
University Fund, Endowment Fund, Asset Management Company, Investment
Manager, Investment Management Company or other Investment Vehicle
Incorporated outside India would be eligible for seeking registration from SEBI.
SEBI for the purpose of registration shall consider whether the applicant is
regulated by an appropriate foreign regulatory authority; or is income tax payer;
or submits a certificate from its banker of its or its promoters, track record
where the applicant is neither a regulated entity nor an income tax payer.
Investment Criteria:

 Disclosure of investment strategy;

 Maximum investment in single venture capital undertaking not to
exceed 25% of the funds committed for investment to India however it
can invest its total fund committed in one venture capital fund;
 Atleast 75% of the investible funds to be invested in unlisted equity
shares or equity linked instruments.
 Not more than 25%of the investible funds may be invested by way of:
o Subscription to initial offer of a venture capital undertaking
whose shares are proposed to be listed subject to lock in period of
one year;
o Debt or debt instrument of a venture capital undertaking in which
the venture capital funds has already made an investment by way
of equity.

Hassle Free Entry and Exit:the Foreign Venture Capital Investors proposing
to make venture capital investment under the Regulations would be granted
registration by SEBI. SEBI Registered Foreign Venture Capital Investors shall
be permitted to make investment on an automatic route within the overall
sectoral ceiling of foreign investment under Annexure III of statement of
Industrial Policy without any approval from FIPB. Further, SEBI registered
FVCIs shall be granted a general permission from the exchange control angle
for inflow and outflow of funds and no prior approval of RBI would be required
for pricing, however, there would be export reporting requirement for the
amount transacted.
Trading in Unlisted Equity: the board also approved the proposal to permit
OTCEI to develop a trading window for unlisted securities where Qualified
Institutional Buyers (QIB) would be permitted to participate.

 REGULATION OF THE BUSINESS OF VENTURE

CAPITAL FUND IN INDIA
 Eligibility conditions for grant of license to a venture capital fund.-

(1) A venture capital fund shall not be granted license unless it fulfills the
following conditions, namely:-

a) It is incorporated as a company under the Companies Ordinance, 1984

(XLVII of 1984);
b) It is not engaged in any business other than that of investment in venture
projects;
c) It has a minimum paid-up capital of fifty million rupees raised through
private placement; and
d) For the purpose of managing its entire business, it has entered into a
contract, in writing, with a venture capital company and a copy of which
has been filed with the Commission.

(2) The board of venture capital fund shall not have a director, who is on the
board of any venture project being financed by the fund.

 Condition for grant of license.-

(1) No venture capital fund shall commence business unless a license is

granted under these rules.

(2) For obtaining a license a venture capital fund shall

 a. Make an application to the Commission on Form V providing
information as sought in Annex therein, along with all the relevant
documents;
b. Submit a bank draft payable to the Commission evidencing the
payment of non-refundable application processing fee amounting
to fifty thousand rupees; and
c. Submit an undertaking that no change in the memorandum and
articles of association and in the directors shall be made without
prior written authorization of the Commission and that all
conditions for grant of license shall be complied with.

(3) On being satisfied that a venture capital fund is eligible for the grant of a
license and that it would be in the public interest so to do, the Commission
may grant a license in form VI.

(4) Without prejudice to any other conditions under these rules, the
Commission may while granting license imposes any conditions, as it may
deem necessary.

 Terms and conditions of operation. - Unless granted a general or

specific waiver by the Commission, a venture capital fund shall
a. Not expose more than forty per cent of its equity to any single
group of companies; Explanation. - For the purposes of this rule
group of companies shall mean companies managed by the
members of one family including spouse, dependent lineal
ascendants and descendants and dependent brothers and sisters.
b. Disclose in its accounts all investments in companies and group of
companies exceeding ten per cent of paid-up capital of venture
capital fund;
 c. ensure that the maximum exposure of the venture capital fund to its
directors, affiliated companies and companies in which any of the
directors and their family members including spouse, dependent
lineal ascendants and descendants and dependent brothers and
sisters hold controlling interest shall not exceed ten per cent of the
overall portfolio of venture capital; and
d. Not accept any investment from any investor, which is less than
one million rupees.
 Renewal of license. –

(1) The license granted to the fund under rule 10 shall be valid for one year and
shall be renewable annually on payment of a fee of twenty thousand rupees on
an application being made on Form VII.

(2) The Commission may, after making such inquiry and after obtaining such
further information as it may consider necessary, renew the license of such
fund, one year on Form VIII on such conditions as it may deem necessary.

 Private placement.-

A venture capital fund shall raise and receive monies for investment in venture
projects through private placement of such securities as may be notified by the
Commission, from time to time.

 Placement memorandum.-

A venture capital fund shall, before soliciting placement of its securities, file
with the Commission a placement memorandum which shall inter alia give
details of the terms subject to which monies are proposed to be raised from
such placements.
  KEY SUCCESS FACTOR FOR VENTURE
CAPITAL INDUSTRY IN INDIA

Knowledge becomes the key factor for a competitive advantage for company.
Venture Capital firms need more expert knowledge in various fields. The
various key success factors for venture capital industry are as follow:

 Knowledge about Govt. changing policies:

Investment, management and exit should provide flexibility to suit the

business requirements and should also be driven by global trends. Venture
capital investments have typically come from high net worth individuals who
have risk taking capacity. Since high risk is involved in venture financing,
venture investors globally seek investment and exit on very flexible terms
which provides them with certain levels of protection. Such exit should be
possible through IPOs and mergers/acquisitions on a global basis and not just
within India. In this context the judgment of the judiciary raising doubts on
treatment of tax on capital gains made by firms registered in Mauritius gains
significance - changing policies with a retrospective effect is undoubtedly
acting as a dampener to fresh fund raising by Venture capital firms.

 Quick Response time :

The companies have flat organization structure results in quicker decision

making. The entrepreneur is relieved of the trauma that one normally goes
through in an interface with a funding institution or a development agency.
They follow a clearly defined decision making process that works with clock
like precision, which means that if they agree on a funding schedule
entrepreneur can count on them to stick it.

 Knowledge about Global Environment

With increasing global integration and mobility of capital it is important that

Indian venture capital firms as well as venture financed enterprises be able to
have opportunities for investment abroad. This would not only enhance their
ability to generate better returns but also add to their experience and
expertise to function successfully in a global environment.

 Good Human Resource :

Venture capital should become an institutionalized industry financed and

managed by successful entrepreneurs, professional and sophisticated
investors. Globally, venture capitalist are not merely finance providers but are
also closely involved with the investee enterprises and provide expertise by
way of management and marketing support. This industry has developed its
own ethos and culture. Venture capital has only one common aspect that cuts
across geography i.e. it is risk capital invested by experts in the field. It is
important that venture capital in India be allowed to develop via professional
and institutional management.

 Balance between three factors

Venture Capital backed companies can provide high returns. However, despite
of success stories like Apple, FedEx of Microsoft, a lot of these deals fail. It is
said that only one out of ten companies succeed. That's why every deal has an
element of potential profit and an element of risk, depending on the deals size.
To be successful, a Venture Capital Company must manage the balance
between these three factors.

Financial markets and

the industries to invest in

Knowledge

Risk management skills Possible investees and

and contacts to investors external expertise

Frame work for key success factor

Knowledge is key, to get the balance in this "Magic Triangle". With knowledge
we mean knowledge about the financial markets and the industries to invest
in, risk management skills and contacts to investors, possible investees and
external expertise. High profits, achievable by larger deals, are not only
important for the financial performance of the Venture Capital Company. As a
good track record they are also a vital argument to attract funds which are the
basis for larger deals. However, larger deals imply higher risks of losses. Many
Venture Capital companies try to share and limit their risks. Solutions could be
alliances and careful portfolio management. There are Venture Capital firms
that refuse to invest in e-start-up because they perceive it as too risky to follow
today's type.

 INDUSTRIAL ATTRACTIVENESS
 Market growth rate

CAGR OF VC

16000 14234
14000
VALUE OF DEALS

12000
10000
8000 43%
6000
4000
2000 1160
0
2000 2007

CAGR of venture capital industry

From the above graph we can say that Venture capital industry is growing at
the CAGR of 43%. And the value of deals in 2000 was 1160 which increased to
14234 in the year of 2007. This shows substantial increase in the number of
deals. This attracts the new entrepreneur to enter in the industry.
  Intensity of competition:
NO. OF VC FIRMS IN INDIA

Series1, 2008, 160

Series1, 2007, 146
NO. OF VC FIRMS

Series1, 2006, 105

Series1, Series1,
2004, 86 2005, 89
Series1, Series1,
2000, 81 Series1,
2001, 77 Series1,
2002, 78 2003, 81

YEARS

Number of venture capital firms in India

Here the number of venture capital firms is increasing year by year. In 2001 it
is only 77 now it has been increased to 160 in the year of 2008. The reason
behind that is there is over all growth in the GDP and also substantial growth
position in sectors like biotechnology, IT-ES, retailing, telecom etc. due to this
more players are eager to establish their foothold in the industry.

 Regulatory policy

Minimum contribution and fund size: the minimum investment in a Venture

Capital Fund from any investor will not be less than Rs. 5 lacs and the minimum
corpus of the fund before the fund can start activities shall be at least Rs. 5
crores. And the foreign players can easily enter in the venture capital industry
of India. An offshore venture capital company may contribute 100% of the
capital of domestic venture capital fund. There are other hurdles to enter in
the industry so there is favorable condition for them to enter in to venture
capital industry in India.
  DOMESTIC ECONOMIC FACTORS:

 GDP growth rate

GDP V/S VC GROWTH RATE

12 300
GDP GROWTH RATE(%)

VC GROWTH RATE(%)
251.06 9.4 9.6
10 8.5 240.91 250
7.5
8 200

6 150

4 89.79 100
2 33.33 50
0 0
2004 2005 2006 2007

GDP GROWTH RATE VC GROWTH RATE

GDP V/S VC Growth rate

In above chart there was a positive relationship there was between GDP
growth rates. But in 2007 the growth of Venture Capital was decline to 89.79%
from 240.91% in 2006 but here the value of deal was increasing. In 2008 the
growth rate is 9% and project the next year GDP 8% to 9%. So here we can
conclude that there is good growth prospect for the venture capital players to
enter in the horizon of India.
 INFLATION v/s VC GROWTH RATE
8 7.4 300

7
251.06 250
5.8

VC GROWTH RATE
6 240.91
INFLATION RATE

200
5 4.5

4 150
3.2
3
100
89.79
2
50
1 33.33
0 0
2004 2005 2006 2007

INFLATION RATE VC GROWTH RATE

Inflation V/S Venture capital growth rate

In above chart the inflation rate is decreased to 4.5 in 2005 from 7.4 in 2004.
At same time the growth of Venture Capital is also declining to 33.33% in 2005
from 251.06% in 2004. From the above chart we can conclude that inflation
and Venture Capital has positive relationship. Now in June 2008 the inflation
rate was 11.9 and the NO. Of deal in first two quarter in 2008 was 170 and
value of deal was 6390 US$mn and in third quarter of 2008 there was only four
deals. And in October the inflation touch the 13.01%. Due to increase in
inflation rate the people will go to spend more. Thus, their savings will
decrease. So more money will come into the market and demand of the
products will increase continuously. Now due to growth of any sector will
attract new entrepreneur to enter in the industry. For that they must need
funds. So there is a great opportunity for venture capital industry to attract this
new entrepreneur.

SMALL SCALE INDUSTRIES

 SMALL SCALE ENTERPRIZE
No. of units ( lakhs)

Series1, 2006-
2007, 128.44
Series1, 2005-
2006, 123.42
Series1, 2004-
Series1, 2003- 2005, 118.59
Series1, 2002- 2004, 113.95
2003, 109.49

Growth of small and medium scale industries

Venture Capital, to be able to contribute to developing entrepreneurship in

India, needs to concentrate its investment in small and medium enterprises. A
“Package for Promotion of Micro and Small Enterprises” was announced in
February 2007. This includes measures addressing concerns of credit, fiscal
support, cluster-based development, infrastructure, technology, and
marketing. Capacity building of MSME Associations and support to women
entrepreneurs are the other important features of this package. SMEs have
been allowed to manage their direct/indirect exposure to foreign exchange risk
by booking/canceling/rollover of forward contracts without prior permission of
RBI.

To boost the micro and small enterprise sector, the bank has decided to
refinance an amount of 7000 crore to the Small Industries Development Bank
of India, which will be available up to March 31, 2010. The Central Bank said
that it is also working on a similar refinance facility for the National Housing
Bank (NHB) of an amount of Rs 4, 000 crore.
  EXPORT AND IMPORT

VALUE OF EXPORT AND IMPORT

200 185.7 185.7

180
155.5
US dollars in billions

160 149.2
140 126.4
120 111.5
103.1
100 83.6
78.1
80 61.4 63.8
52.7
60
40
20
0
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

EXPORT IMPORT

Value of export import

The value of Import and export are increasing year by year. In 2002-03 the
value of import and export are 52.7 and 61.4 US$bn respectively and in 2007-
08 the value of import and export are 155.7 and 185.7 US$bn. It means
industry needs more money for import and export. So it is an opportunity for
venture capital. On the other side when company going to export the company
must have good contact with other country’s company. So for that venture
capital industry is useful because they have good contact and affiliation
network with other country’s company.

Industry Profitability:

The venture capital firms invest their money in most emerging sectors like
biotechnology, IT-ES, retailing, infrastructure which gives higher return but also
they all involved risk in substantial amount.

Possible result of venture capital investments

 No. of companies out of 10 Annual rate of
investments return

Failure 4 0%

Viable 3 15%

Solid 2 50%

Superstars 1 100%

Blended average 24.5

Success ratio of venture capital deals

From the above table we can see the success ratio of the venture capital
investment. 40% of the investments are getting failure and only 10% of them
are able to give 100% return. And the average return by the venture capitalists
is only 24.5% which is not extra ordinary. This type of returns can be found in
many other investment options. So there isn’t any special reason to invest in
venture capital.

 Product innovation:

Venture capital firms are coming with new ideas of investment to attract the
buyers to their firms. For this purpose they are introducing new types of funds
and schemes.

For example, IFCI Venture Capital Funds Limited (IVCF) has launched three
new funds in emerging sectors of the economy namely:
i) India Automotive Component Manufacturers Private Equity Fund –1-
Domestic (IACM-1-D) with a target corpus of Euro 60 million equivalent to
Rs.396 crores. This Fund will be dedicated for investment mainly in Indian
Automotive Component companies and in other related/ emerging sectors.

ii) India Enterprise Development Fund (IEDF), a Venture Capital fund set up
with target corpus of Rs.250 crores to invest in knowledge based projects in key
sectors of Indian economy with outstanding growth prospects.

iii) Green India Venture Fund (GIVF), a Venture Capital fund setup with a
target corpus of Euro 50 million (approx. Rs.330 crores) with the objective to
invest in commercially viable Clean Development Mechanism (CDM), energy
efficient and other commercially viable projects with an aim to reduce negative
ecological impact, efficient usage of resources such as energy, power etc and
other related sectors/projects. The summary of the Funds:

Launching of new funds by IFCI

Funds IACM –1 GIVF IEDF

Objective To invest in Indian The objective of To invest in

companies engaged GIVF would be to knowledge based
in, amongst others, invest in companies projects with
the automotive parts setting up Clean relatively high entry
and components Development barriers, critical
manufacturing sector Mechanism (CDM) applications,
in order to generate projects and other prospects for high
high returns for its commercially viable growth and global
investors. projects/ business. scalability in
diversified and/ or
 emerging sectors.

Size Euro 60 million (INR Euro 50 million INR 250 Cr

396 Cr) (INR 330 Cr) with
green shoe option

Nature of Fund PE Fund VC Fund VC Fund

Tenure 8 yrs. With two 10 years with two 10 years with two
prolongation option of prolongation options prolongation options
1 year each of 1 year each of 1 year each.

Expected returns 20% p.a. 20% p.a. 20% p.a.

Size of Rs. 6 to 40 Cr Rs. 2 to 30 Cr Rs. 2 to 25 Cr

investment

Management fee 2% of the total 2% of the total 2% of the total

subscription amount subscription amount subscription amount

Launching of new funds by IFCI

The SICOM venture capital firm introduce SME opportunity fund for small scale
industries.

 GUIDELINES FOR OVERSEAS VENTURE

CAPITAL INVESTMENT IN INDIA

In recognition of growing importance of Venture Capital as one of the sources

of finance for Indian industry, particularly for the smaller unlisted companies,
the Government has announced a policy governing the establishment of
domestic Venture Capital Funds/Companies. An amendment has also been
carried out in the SEBI Act empowering the Securities and Exchange Board of
India (SEBI) to register and regulate Venture Capital Funds (VCFs) and
Venture Capital Companies (VCCs) through specific regulations.

With a view to augment the availability of Venture Capital, the Government has
decided to allow overseas venture capital investments in India subject to
suitable guidelines as outlined below:

 Offshore investment may invest in approved domestic Venture Capital

Funds/Companies set up under the new policy after obtaining FIPB approval
for the investment. There is no limit to the extent of foreign contribution to a
domestic venture capital company/ fund. An offshore venture capital
company may contribute 100% of the capital of domestic venture capital
fund, and may also set up a domestic asset management company to manage
the Fund.
 Establishment of an asset management company with foreign investment to
manage such funds would require FIPB approval and would be subject to the
existing norms for foreign investment in non-bank financial services
companies.
 Once the initial FIPB approval has been obtained, the subsequent investment
b y the domestic venture capital company/fund in Indian companies will not
require FIPB approval. Such investments will be limited only by the general
restriction applicable to venture capital companies viz.-
o A minimum lock-in period of three years will apply to all such
investments.
o VCFs and VCCs shall invest only in unlisted companies and their
investment shall be limited to 40% of the paid up capital of the
company. The ceiling will be subject to relevant equity investment
limits that may be in force from time to time in relation to areas
reserved for the Small Scale Sector.
 o Investment in any single company by a VCF/VCC shall not exceed
20% of the paid-up corpus of the domestic VCF/VCC.
 The tax exemption available to domestic VCFs and VCCs under Section
10(23F) of the Income Tax Act, 1961, will also be extended to domestic
VCFs and VCCs which attract overseas venture capital investments provided
these VCFs/VCCs conform to the guidelines applicable for domestic
VCFs/VCCs. However, if the VCF/VCC is willing to forego the tax
exemptions available under Section 10(23F) of the Income Tax Act, it would
be within its rights to invest in any sector.
 Income paid to offshore investors from Indian VCFs/VCCs will be subject to
tax as per the normal rates applicable to foreign investors.
 Offshore investors may also invest directly in the equity of unlisted Indian
companies without going through the route of a domestic VCF/VCC.
However, in such cases each investment will be treated as a separate act of
foreign investment and will require separate approval as required under the
general policy for foreign investment proposals.

 CHALLENGES AHEAD FOR VENTURE CAPITAL

FINANCING IN INDIA

Venture Capital is money provided by professionals who invest and manage

young rapidly growing companies that have the potential to develop into
significant economic contributors. According to SEBI regulations, venture
capital fund means a fund established in the form of a company or trust, which
raises money through loans, donations, issue of securities or units and makes or
proposes, to make investments in accordance with these regulations. The funds
so collected are available for investment in potentially highly profitable
enterprises at a high risk of loss. A Venture Capitalist is an individual or a
company who provides. Investment Capital, Management Expertise,
Networking & marketing support while funding and running highly innovative
& prospective areas of products as well as services.
Thus, the investment made by Venture Capitalists generally involves –
o Financing new and rapidly growing companies.
o Purchasing equity securities.
o Taking higher risk in expectation of higher rewards.
o Having a long frame of time period, generally of more than 5 - 6 years.
o Actively working with the company's management to devise strategies
pertaining to the overall functioning of the project.
o Networking and marketing of the product /service being offered.

In an attempt to bring together highly influential Indians living across the

United States, a networking society named IND US Entrepreneurs or TiE was
set up in 1992. The aim was to get the Indian community together and to foster
entrepreneurs for wealth creation. A core group of 10 - 15 individuals worked
hard to establish the organization. The group (TiE) has now over 600 members
with 20 offices spread across the United States. Some of the famous
personalities belonging to this group are Vinod Dham (father of the Pentium
Chip), Prabhu Goel, and K.B. Chandrashekhar (Head of $ 200 mn. Exodus
Communications, a fibre optic network carrying 30% of all Internet content
traffic hosting websites like Yahoo, Hotmail and Amazon.)

 PROBLEMS OF VENTURE CAPITAL

FINANCING IN INDIA:

VCF is in its nascent stages in India. The emerging scenario of global

competitiveness has put an immense pressure on the industrial sector to improve
the quality level with minimization of cost of products by making use of latest
technological skills. The implication is to obtain adequate financing along with
the necessary hi-tech equipments to produce an innovative product which can
succeed and grow in the present market condition. Unfortunately, our country
lacks on both fronts. The necessary capital can be obtained from the venture
capital firms who expect an above average rate of return on the investment. The
financing firms expect a sound, experienced, mature and capable management
team of the company being financed. Since the innovative project involves a
higher risk, there is an expectation of higher returns from the project. The
payback period is also generally high (5 - 7 years). The various problems/
queries can be outlined as follows:

o Requirement of an experienced management team.

o Requirement of an above average rate of return on investment.
o Longer payback period.
o Uncertainty regarding the success of the product in the market.
o Questions regarding the infrastructure details of production like plant
location, accessibility, relationship with the suppliers and creditors,
transportation facilities, labor availability etc.
o The category of potential customers and hence the packaging and pricing
details of the product.
o The size of the market.
o Major competitors and their market share.
o Skills and Training required and the cost of training.
o Financial considerations like return on capital employed (ROCE), cost of
the project, the Internal Rate of Return (IRR) of the project, total amount
of funds required, ratio of owners investment (personnel funds of the
entrepreneur), borrowed capital, mortgage loans etc. in the capital
employed.
  OPPORTUNITIES AND THREATS
 OPPORTUNITIES:

Initiatives taken by the Government in formulating policies to encourage

investors and entrepreneurs

The emerging scenario of global competitiveness has put an immense pressure

on the industrial sector to improve the quality level with minimization of cost of
products by making use of latest technological skills. The implication is to
obtain adequate financing along with the necessary hi-tech equipments to
produce an innovative product which can succeed and grow in the present
market condition. Unfortunately, our country lacks on both fronts. The
necessary capital can be obtained from the venture capital firms who expect an
above average rate of return on the investment. Government of India
understands this.

Also, The Government of India in an attempt to bring the nation at par and
above the developed nations has been promoting venture capital financing to
new, innovative concepts & ideas, liberalizing taxation norms providing tax
incentives to venture firms, giving an opportunity for the creation of local pools
of capital and holding training sessions for the emerging VC investors.

In the year 2000, the finance ministry announced the liberalization of tax
treatment for venture capital funds to promote them & to increase job creation.
This is expected to give a strong boost to the non resident Indians located in the
Silicon Valley and elsewhere to invest some of their capital, knowledge and
enterprise in theseventures.

o SME GROWTH
 No. deals V/S No. of SMEs

450 128.44 130

400 387
123.42 125
350
299
300 120
118.59
250
115
200 113.95
146
150 109.49 110
100 71
56 105
50
0 100
2003 2004 2005 2006 2007

No. of deals No. of SMEs

VC, to be able to contribute to developing entrepreneurship in India, needs to

concentrate its investment in small and medium enterprises. A “Package for
Promotion of Micro and Small Enterprises” was announced in February 2007.
This includes measures addressing concerns of credit, fiscal support, cluster-
based development, infrastructure, technology, and marketing. Capacity
building of MSME Associations and support to women entrepreneurs are the
other important features of this package. SMEs have been allowed to manage
their direct/indirect exposure to foreign exchange risk by
booking/canceling/rollover of forward contracts without prior permission of
RBI.

To boost the micro and small enterprise sector, the bank has decided to
refinance an amount of 7000 crore to the Small Industries Development Bank
of India, which will be available up to March 31, 2010. The Central Bank said
that it is also working on a similar refinance facility for the National Housing
Bank (NHB) of an amount of Rs 4, 000 crore.
The Indian economy is growing at 8-9% so the there is a development of all
sector like manufacturing, services sector. So there is a great opportunities for
Venture Capital firms. Because mostly invest their money in this sectors.

India amongst leading entrepreneurial Hotbeds globally

City competencies emerging

o Bangalore
 All IP-led companies; IT and IT-enabled services
o Delhi (NCR)
 Software services, IT enabled services, Telecom
o Mumbai
 Software services, IT enabled services, Media, Computer Graphics,
Animation, Banking
o Other emerging Centers
 Chennai, Hyderabad, and Pune

Emerging sectors for investments

As the venture industry continues to accelerate, a number of trends that cross

geographies can be seen. The industry is becoming even more globalized .As a
result, innovation in clean tech, IT, and healthcare, pharmaceutical are having
a global impact. This changing landscape is driving new approaches in how
large corporations are interacting with the venture community.

Clean technology

Global climate changes, high oil prices, accelerated growth in emerging

markets, energy security concerns and the finite nature of resources are some
of the key drivers of the growing global demand for clean technologies in
energy and water. In addition ,the increased willingness of consumers and
governments to pay for and use green technologies ,combined with the
positive exit environment of the last years ,has provided venture capitalists
with the confidence to invest in emerging companies around the globe.

According to the research from Dow Jones Venture One and Ernst &Young .US
$1.28 billion was invested in 140financing rounds in 2006 in China , Europe
Israel and United States that compares to US $ 664.1 million invested in 103
financing rounds in 2005,showing the capital investment in the field has nearly
doubled over the past year. It is expected that investment in clean
technologies will continue to increase not only in developed markets but also
in the developing markets, mainly in India and China.

Biotechnology

Over last few years ,the story of the US biotech industry has been one of the
remarkable success .There are signs that this success story is now repeated in
other parts of world ,with maturing pipelines, record breaking financing totals,
strong deal activity and impressive financial results. Industry is grew 31% for
second year in raw in 2007.

Pharmaceutical

The industry's growth rate is likely to touch 19 per cent from the current 13 per
cent, according to a projection released by the Confederation of Indian
Industries (CII), on September 1, 2008.

According to a McKinsey study, the Indian pharmaceutical industry is projected

to grow to US$ 25 billion by 2010 whereas the domestic market is likely to
more than triple to US$ 20 billion by 2015 from the current US$ 6 billion to
become one of the leading pharmaceutical markets in the next decade.

The Indian pharmaceutical industry has shown robust growth in terms of

infrastructure development, technology base creation and a wide range of
products with a determination to flourish in the rapidly changing environment,
thereby establishing its global presence. The Indian pharmaceutical industry
has increased its competitive intensity owing to pricing pressures and striving
consistently to innovate. ICICI Venture-controlled Ranbaxy Fine Chemicals
(RFCL) has acquired the US-based specialty chemicals major Mallinckrodt Baker
in a deal estimated at US$ 340 million.

So there is great opportunity for venture capital industry to invest their money
in this sector. Nowadays, India will become a global pharmacy hub exporting
by exporting domestically produced generic products.

IT/IT-ES Industry

The Department of Information Technology is setting up Nano Electronic

Centers at the Indian Institute of Technology, Mumbai and the Indian Institute
of Science, Bangalore. With an outlay of about Rs. 100 crore to carry out R&D
activities in nano-electronics devices and materials.

In 2006-07, the performance of the Information Technology Enabled Services–

Business Process Outsourcing (ITES-BPO) industry was marked by double-digit
revenue growth, steady expansion into newer service lines and increased
geographic penetration and an unprecedented rise in investments by
multinational corporations (MNCs).
The Special Incentive Package Scheme (SIPS) to encourage investments for
setting up semiconductor fabrication and other micro- and nano-technology
manufacturing industries was announced in March2007. The incentives
admissible would be 20 per cent of the capital expenditure during the first 10
years for units located in Special Economic Zones (SEZs) and 25 per cent for
units located outside SEZs.

Electronic Industry

There is a high growth of software and solutions related to the consumer

Internet, software as a service (SAAS), open source, software-cum-services and
telecommunications (both wireless and wire-line) products and related
services. There is a great opportunity for venture capital industry to invest in
this electronic production industry.

Threats:

Venture Capital Market in India Getting Overheated

The Venture Capital market in India seems to be getting as hot as the country’s
famous summers. However, this potential over-exuberance may lead to some
stormy days ahead, based on sobering research compiled by global research
and analytics services firm, Evalueserve. Evalueserve research shows an
interesting phenomenon is beginning to emerge:

Over 44 US-based Venture capital firms are now seeking to invest heavily in
start-ups and early-stage companies in India. These firms have raised, or are in
the process of raising, an average of US $100 million each. Indeed, if these 40-
plus firms are successful in raising money, they would garner approximately
$4.4 billion to be invested during the next 4 to 5 years. Taking Indian
Purchasing Power Parity (PPP) into consideration, this would be equivalent to
$22 billion worth of investment in the US. Since about $1.75 billion (or
approximately 40% of $4.4 billion) has been already raised, even if only $2.2
billion is raised by December 2006, Evalueserve cautions that there will be a
glut of Venture Capital money for early stage investments in India. This will be
especially true if the VCs continue to invest only in currently favorite sectors
such as IT, BPO, software and hardware products, telecom, and consumer
Internet. Given that a typical start-up in India would require $9 million during
the first three years (i.e., $3 million per year) and even assuming that the start-
up survives for three years, investing $2.2 billion during 2007-2010 would
imply investing in 150 to 180 start-ups every year during this period, which
simply does not seem practical if the VCs continue to focus only on their
current favorite sectors.

Unproductive workforce:

A global survey by McKinsey & Company revealed that Indian business leaders
are much more optimistic about the future than their international peers. So
Indian employees are tardy in their job so it will effect reversely on the
economic condition of the country. Because they are unproductive to the
economy of the country.
Exit route barriers:

Due to crash down of market by 51% fromJanuary to November 2008. It

creates a problemfor venture capital firms. Because nobody is trying to come
up with IPO and IPO is the exits route door Venture Capital.

Taxes on emerging sector:

As per Union Budget 2007 and its broad guidelines, Government proposed to
limit pass-through status to venture capital funds (VCFs) making investment in
nine areas. These nine areas are biotechnology, information technology,
nanotechnology, seed research and development, R&D for pharmacy sectors,
dairy industry, poultry industry and production of bio-fuels. Pass-through
status means that the incomes earned by funds are taxable now.
 CONCLUSION

The study provides that the maturity if the still nascent Indian Venture Capital
market is imminent.

Venture Capitalists in Indian have notice of newer avenues and regions to

expand. VCs have moved beyond IT service but are cautious in exploring the
right business model, for finding opportunities that generate better returns for
their investors.

In terms of impediments to expansion, few concerning factors to VCs include;

unfavourable political and regulatory environment compared to other
countries, difficulty in achieving successful exists and administrative delays in
documentation and approval.

In spite of few non attracting factors, Indian opportunities are no doubt

promising which is evident by the large number of new entrants in past years
as well in coming days. Nonetheless the market is challenging for successful
investment.

Therefore, Venture capitalists’ responses are upbeat about the attractiveness

of the India as a place to do the business.