VENTURE CAPITAL

BACHELOR OF MANAGEMENT STUDIES

(2012-2013)

PROJECT GUIDE: Prof. ZEENAT KHAN

SUBMITTED BY AMAR KANADE 255

CHIKITSAK SAMUHAS S.S. & L.S. PATKAR COLLEGE OF ARTS & SCIENCE AND V.P. VARDE COLLEGE OF COMMERCE &ECONOMICS S.V ROAD, GOREGAON (WEST), MUMBAI 400 062. Cover page black font gold
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VENTURE CAPITAL

BACHELOR OF MANAGEMENT STUDIES

(2012-2013)

Submitted In Partial Fulfilment of the Requirements For the Award of Degree of Bachelor of Management Studies

BY AMAR KANADE 255

CHIKITSAK SAMUHAS S.S. & L.S. PATKAR COLLEGE OF ARTS & SCIENCE AND V.P. VARDE COLLEGE OF COMMERCE & ECONOMICS S.V ROAD, GOREGAON (WEST), MUMBAI 400 062.
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CHIKITSAK SAMUHAS S.S. & L.S. PATKAR COLLEGE OF ARTS & SCIENCE AND V.P. VARDE COLLEGE OF COMMERCE & ECONOMICS S.V ROAD, GOREGAON (WEST), MUMBAI 400 062.

CERTIFICATE

This is to certify that Mr/Miss._____________________________________________ Of Bachelor of Management Studies (2012-2013) has successfully completed the project on __________________________________ under the guidance of _____________________________________

Course Co-ordinator

Principal

Project Guide/ Internal Examiner

External Examiner
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DECLARATION

I _____________________________________________ the student of Bachelor of Management Studies (2012 -2013) hereby declare that I have completed the project on _______________________________________________________ The information submitted is true and original to the best of my Knowledge.

Signature

AMAR KANADE 255

ACKNOWLEDGEMENT

One of the pleasant aspects of preparing a project is the opportunity to thank to those who have contributed to make the project completion possible. I am extremely thankful to Prof. ZEENAT KHAN, whose active interest in the project insight helped us to formulate, redefine and implement our approach towards the project. I am also thankful to all those seen and unseen hands & heads, which have been of direct and indirect, help in completion of the project.

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 investment in land, building, plant and machinery. The assets/ collateral-backed leading instruments adopted 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 its exploits the vast and untapped potentialities and promotes the growth of the knowledge-based industries worldwide. In India too, 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. The report deals with the concept of venture capital with particular reference to India. The report includes all facts, rules and regulations regarding Venture Capital.

NAME OF THE TOPIC

Venture Capital in India

EXECUTIVE SUMMARY

Venture Capital is growing business of recent origin in the area of industrial financing in India. The various financial institutions 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 newly or relatively unknown entrepreneurs. They contend to give debt finance, mostly in form of terms loans to the promoters and their functioning has been more akin to that of commercial banks. Starting and growing a business always require a capital. There are number of alternative methods to fund growth. These include the owners of proprietors own capital, arranging debt finance, or seeking and equity partner, as in case with private equity and venture capital. Venture Capital is a means of equity financing for rapidly-growing private companies. Finance may b 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 specialisation (eg. IT, Infrastructure, Health/Life Sciences, Clean Technology, etc.).

Indian Venture Capital and Private Equity Association (IVCA) is a member based national organisation that represent venture capital and private equity firms, promote the industries within India and throughout the world and encourages investment in high growth companies.

IVPC members compromise venture capital firms, institutional investors, banks, incubators, angel groups, corporate advisors, accountants, lawyers, government bodies, academic institutions and other service providers to the venture capitals and private equity industry. Members represent most of the active venture capital providers and private equity firms in India. These firms provide capital for seed venture, early stage companies, and

growth finance for management buy-outs/buy-ins of established companies.

Venture Capitalists have been catalytic in bringing forth technological innovations in USA. A similar act can be performed in India. As venture capital has good scope in India for three reasons: First: The abundance of talent is available in the country. The low cost high quality workforce that has helped the computer users worldwide in Y2K project is demonstrated asset. Second: A good number of successful entrepreneurs in Silicon Valley should have a demonstration effect to venture capitalists to invest in India at home. Third: The opening up of Indian economy and its integration with the world economy is providing a wide variety of niche market for Indian entrepreneurs to grow and prove themselves.

Table of contents

Sr. No. 1.

Particulars Introduction to Project (Synopsis) Objectives of the Study Statement of Problem Limitation of Project Scope of Project Research Design and Instruments

Page No. 1-00 1

2.

Conceptual Framework

00-00

INTRODUCTION TO VENTURE CAPITAL

OBJECTIVES OF THE STUDY

Understand the concept of Venture Capital:Venture Capital funding is different from traditional sources of financing. Venture Capitalist 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 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 economic ventures capital has played a developmental role.

Study Venture Capital in global scenario:Venture Capital has played a important role in U.K., Australia, and Hong Kong also in development of technology growth of exports and employment.

Study Evaluation & need of Venture Capital industry in India:India is still at 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 substantial growth and for maintaining Indias competitive edge.

Understand the legal framework formulated by SEBI to encourage Venture Capital activity in Indian economy:Promoting sound public policy 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.

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STATEMENT OF PROBLEM
Venture Capital is in its nascent stage in India. Te emerging scenario of global competitiveness has put an immense pressure on the industrial sector to improve the quantity level with minimization of cost of products by making use latest technology skills. The financing firm 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/quires can be outlined as follows:

1. Problems regarding the infrastructure details of production like plant location, accessibility, relationships with the suppliers and creditors, transport facility and labour availability etc. 2. The limited infrastructure, low foreign investment and other transitional problem, because of above three reasons availability of fund is very low in market. 3. Uncertainty regarding the success of the product in the market. 4. As there is requirement of experienced management team, due to unavailability of experienced and skilled people it is difficult to analyse the future growth of the product in the market. 5. Government has taken all the initiatives in formulating the policies to encourage the investors and entrepreneurs. A government policy has many rules and regulations that can create problems in allocating funds to the Organisation.

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 capitals funds/companies that are member of Indian Venture Capital Association are to be included in the study.

SCOPE OF THE PROJECT

The scope of the project includes all types of venture capital firms setup as a company & funds irrespective of facts that they are registered with SEBI of India or not part of this study.

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RESEARCH DESIGN AND INSTRUMENTS

In India neither venture capital theory has been developed nor there are 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 capitalist and social and environmental impact on the existing framework.) The research is based on secondary data collected. The data was also collected from the publications and press release of venture capital associations in India. Scanning the business papers filled the gaps in the information. The Economic Times, Financing Express and Business Standards were scanned for any article or news items related to venture capital. Sufficient amount of data about the venture capital has been derived from this project.

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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 recourse 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 relative new and professionally or technically qualified entrepreneurs with inadequate funds. The conventional financers, 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 if the high return usually through substantial capital gains in term. Venture capital in broad sense is not solely an injection of funds into a new firm, it is also an input of skills needed to setup the firm, design its marketing strategy, organize and manage it. Thus it is a long term association with successive stages of companys development under highly risky investment condition with distinctive type of financing appropriate to each stage of development. Investor join the entrepreneurs as co-partners and support the project with finance and business skill to exploit the market opportunities. Venture capital is not a passive finance. It may be at any stage of business production cycle, that is start-up, expansion or to improve a product or process which are associated with both risk and reward. The Venture capital gain trough appreciation in the value of such investment when the new technology succeeds. Thus the primary return sought by the investor is essentially capital gain rather than steady interest income or dividend yield.

The most flexible definition of Venture Capital is:The support by investor of entrepreneurial talent with finance and business skills to exploit market opportunities and thus obtain capital gains.

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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 start up capital to high risk-high reward ventures. Ventures capital assumes four type of risks, these are: o o o o Management risk -Inability of management teams to work together. Market risk -Product may fail in the market. Product risk -Product may not be commercially viable. Operation risk -Operation may not be cost effective resulting in increased cost decreased gross margin.

High Tech
As opportunities in the low technology tend to be few of lower order, and hi-tech projects generally offer higher returns than projects in more traditional area, venture capital investment are made in high technical areas using new technologies or producing innovative goods by using new technology. Not just high technology, any high risk ventures where the entrepreneurs 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.

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 Equity Participation & Capital Gains

Investment are generally in equity participation thorough direct purchase of share, options, convertible debentures where the debt holder has the option to convert the loan instrument 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 early stage of business, because dividends can be delayed, equity investment implies that investor 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 companys 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 advise the promoters on project planning, monitoring, financial management, including working capital and public issue. Venture capital investor cannot interface 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 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.

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 Illiquid Investment
Venture capital investments are illiquid that is not subject to repayment on demand or following a repayment schedule. Investor seek ultimately by means of capital gain when the investment is sold at market place. The investment is realised 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.

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THE VENTURE CAPITAL SPECTURM/STAGES

The requirement of funds varies with the life stages of the enterprise. Even before a business plan is prepared the entrepreneur invest his time and resources in surveying the market, finding and understanding the target customers and their needs. At the seed stage the entrepreneurs continue to fund the venture with his own fund or family funds. At this stage the fund are needed to solicit the consultants services in formulation of business plans, meeting potential customers and technology partners. Next the funds would be required for development of the product/process and producing prototypes, hiring key people and building up the managerial team. This is followed by funds for assembling the manufacturing and marketing facilities in that order. Finally the funds are needed to expand the business and attain the critical mass for profit generation. Venture capitalist caters to the needs of the entrepreneurs at different stages of their enterprises. Depending upon the stages they finance, venture capitalist are called angel investors, venture capitalist or private equity supplier/investor. Venture capital was started as early stage financing small but rapidly growing companies. However various reasons forced venture capitalist 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 capitalist began to operate across a broader spectrum of investment interest. This diversity of opportunities enables venture capitalists to balance their activities in term of time involvement, risk acceptance and reward potential, while providing ongoing assistance to developing business. Different Venture capital firms have different attributes and aptitudes for different types of Venture capital investments. Hence there are different stages of entry for different venture capitalists and they can identify and differentiated between types of venture capital investments, each appropriate for the given stage of the investee company, these are:-

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Venture Capital Spectrum/Stage

Early Stage Finance Seed Capital Start-up Capital Early/First Stage Capital Later/Third Stage Capital

Later Stage Finance Development Stage Capital Replacement Finance Management buyout Management buy in 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 Early stage finance

Period (funds locked in years) 7-10

Risk perception Extreme

Activity to be financed For support a concept or idea or R & D for product development. Initializing operations or developing prototypes Start commercial production and marketing. Expand market & growing working capital need. Market expansion, acquisition & product development for profit
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Start-up First stage Second Stage Later Stage finance

5-9 3-7 3-5 1-3

Very high High Sufficiently Medium

Buy out-in Turnarounds Mezzanine

1-3 1-3 1-3

Medium Medium to high Low

making company. Acquisition financing Turning around a sick company 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 quality for start up capital.

The characteristic of the seed capital may be enumerated as follows: Absence of ready product market Absence of complete management team Product/process still in R & D stage Initial period/licensing stage of technology transfer

Broadly speaking seed capital investment may take 7 to 10 years to achieve realisation. It is the earliest and therefore riskiest stage of Venture capital investment. The new technology and innovations begin 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 realising significant gains in long term. Typically seed enterprises lack assets base or track record to obtain finance from conventional sources and are largely dependent upon entrepreneurs personal resources. Seed capital is provided after being satisfied that the entrepreneur has used 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 goods management team) so often sought by venture capitalists.

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
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establishment of a going concern. Here in the business concept has been fully investigated and the business risk now become 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: Establishment of company or business: The company is either being organised or is established recently. New business activity could be based on experts, experience or spin-off from R & D. Establishment of most but not all the members of the team: The skills and fitness to the job and situation of the entrepreneurs team is an important factor for start up finance. 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 capitalists investment criteria shifts from idea to people involved in the venture and the market opportunities. Before committing any finance at this stage, venture capitalist however, beside the skills, suitability and competence of the managerial team are also evaluated. If required they supply managerial skill and supervision for implementation. The time horizons 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 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 of finance normally provided by the majority of financial institutions. Longer time scale for using route demands continued watch on start up projects.

Early Stage Finance It is also called first stage capital is provided to entrepreneur who has a product, to start commercial production and marketing, not

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