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VENTURE CAPITAL IN INDIA


CHAPTER 1
INTRODUCTION
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VENTURE CAPITAL IN INDIA
The Venture capital sector is the most vibrant inustr! in the "inancial mar#et toa!$
Venture capital is mone! provie b! pro"essionals %ho invest alon&sie mana&ement
in !oun&' rapil! &ro%in& companies that have the potential to evelop into
si&ni"icant economic contributors$ Venture capital is an important source o" e(uit! "or
start)up companies$
Venture capital can be visuali*e as your ideas and our money concept o" evelopin&
business$ Venture capitalists are people %ho pool "inancial resources "rom hi&h net %orth
iniviuals' corporate' pension "uns' insurance companies' etc$ to invest in hi&h ris# + hi&h
return ventures that are unable to source "uns "rom re&ular channels li#e ban#s an capital
mar#ets$ The venture capital inustr! in Inia has reall! ta#en o"" in$ Venture capitalists not onl!
provie monetar! resources but also help the entrepreneur %ith &uiance in "ormali*in& his ieas
into a viable business venture$
Five critical success factors have been identified for the ro!th of "C in India# na$el%&
The re&ulator!' ta, an le&al environment shoul pla! an enablin& role as internationall!
venture "uns have evolve in an atmosphere o" structural "le,ibilit!' "iscal neutralit! an
operational aaptabilit!$
Resources raisin&' investment' mana&ement an e,it shoul be as simple an "le,ible as
neee an riven b! &lobal trens$
Venture capital shoul become as institutionali*e inustr! that protects investors an
investor "irms' operatin& in an environment suitable "or raisin& the lar&e amounts o" ris#
capital neee an "or spurrin& innovation throu&h start)up "irms in a %ie ran&e o" hi&h
&ro%th areas$
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VENTURE CAPITAL IN INDIA
In vie% o" increasin& &lobal inte&ration an mobilit! o" capital it is important that Inian
venture capital "uns as %ell as venture "inance enterprises are able to have &lobal
e,posure an investment opportunities$
In"rastructure in the "orm o" incubators an R . D nee to be promote usin&
&overnment support an private mana&ement as has success"ull! been one b! countries
such as the U/' Israel an Tai%an$ This is necessar! "or "aster conversion o" R.D an
technolo&ical innovation into commercial proucts$
0ith technolo&! an #no%le&e base ieas set to rive the &lobal econom! in the comin&
millennium' an &iven the inherent stren&th b! %a! o" its human capital' technical s#ills' cost
competitive %or#"orce' research an entrepreneurship' Inia can unleash a revolution o" %ealth
creation an rapi economic &ro%th in a sustainable manner$ 1o%ever' "or this to happen' there
is a nee "or ris# "inance an venture capital environment' %hich can levera&e innovation'
promote technolo&! an harness #no%le&e base ieas$
The concept o" Venture capital is ver! recent as compare to U/A' U2' Europe' Israel etc$
Venture Capital "unctions %ere run b! evelopment "inancial institutions such as the ID3I
4Inustrial Development 3an# o" Inia5' ICICI 3an#' an /tate 6inancial corporations$ Publicl!
raise "uns %ere the main source o" Venture Capital$ This source o" "inancin& %as ho%ever
threatene b! mar#et "its7 va&aries an "ollo%in& the raisin& o" minimum pai up capital
re(uirements "or bein& liste at stoc# e,chan&es' problems %ere in store "or small "irms %ith
"easible pro8ects$
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The ;th "ive !ear plan as %ell as the "iscal polic! o" the <overnment o" Inia ac#no%le&e the
necessit! "or venture capital$ =ear 1>;- also "ostere venture capital as a source o" "unin& ne%
entrepreneurs an technolo&! %hich %as &iven b! the report o" the Committee on Development
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VENTURE CAPITAL IN INDIA
o" small an meium entrepreneurs$ The &overnment o" Inia' rel!in& on the 0orl ban#@s stu!
o" the inspection o" the potential o" evelopment o" Venture Capital in the private sector too# a
1polic! initiative an communicate &uielines "or Venture Capital 6uns in 1>AA but these %ere
restrictive B allo%in& the settin& up o" Venture Capital 6uns b! ban#s or "inancial institutions
onl!$
=ear 1>AA mar#e the establishment o" the Technolo&! Development an In"ormation Compan!
o" Inia Lt$ 4TDICI5 promote b! the ICICI an UTI 4Unit Trust o" Inia5 an %as immeiatel!
"ollo%e b! the <u8urat Venture 6inance Lt$ 1o%ever' there %as no si&ni"icant Venture Capital
activit! till the mi 1>>CsB un"rienl! polic! an re&ulator! "rame%or# bein& the ma8or reasons$
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VENTURE CAPITAL IN INDIA
CHAPTER '
ORI(IN OF
"ENTURE
CAPITA)
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VENTURE CAPITAL IN INDIA
The stor! o" venture capital is ver! much li#e the histor! o" man#in$ In the "i"teenth centur!'
Christopher Columbus sou&ht to travel %est%ars instea o" east%ars "rom Europe an so
planne to reach Inia$ 1is "ar) "etche iea i not "in "avour %ith the 2in& o" Portu&al' %ho
re"use to "inance him$ 6inall!' Fueen Isabella o" /pain ecie to "un him an the vo!a&es o"
Christopher Columbus are no% empanelle in histor!$ An thus evolve the concept o" Venture
Capital$
The moern venture capital inustr! be&an ta#in& shape in the post 0orl 0ar 2$ It is o"ten sai
that people ecie to become entrepreneurs because the! see role moels in other people %ho
have become success"ul entrepreneurs because the! see role moels in other people %ho have
become success"ul entrepreneurs$ Guch the same can be sai about venture capitalists$ The
earliest members o" the or&ani*e venture capital inustr! ha several role moels' incluin&
these three H
A$erican Research and Develo*$ent Cor*oration&
6orme in 1>?E' %hose bi&&est success %as Di&ital E(uipment$ The "ouner o" ARD %as
<eneral <eor&es Doroit' a 6rench)born militar! man %ho is consiere Ithe "ather o" venture
capitalJ$ In the 1>DCs' he tau&ht at the 1arvar 3usiness /chool$ 1is lectures on the importance
o" ris# capital %ere consiere (uir#! b! the rest o" the "acult!' %ho concentrate on
conventional corporate mana&ement$
+,H, -hitne% . Co&
Also "orme in 1>?E' one o" those earl! hits %as Ginute Gai 8uice$ Koc# 0hitne! is consiere
one o" the inustr!@s "ouners$
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VENTURE CAPITAL IN INDIA
The Roc/efeller Fa$il%&
L / Roc#e"eller' one o" those earliest investments %as in Eastern Airlines' %hich is no% e"unct
but %as one o" the earliest commercial airlines$
The Inian Private E(uit! an Venture Capital Association %as establishe in 1>>- an is base
in Ne% Delhi' the capital o" Inia$ IVCA is a member base national or&ani*ation that represents
Venture capital an Private e(uit! "irms' promotes the inustr! %ithin Inia an throu&hout the
%orl an encoura&es investment in hi&h &ro%th companies$ It enables the evelopment o"
venture capital an private e(uit! inustr! in Inia an to support entrepreneurial activit! an
innovation$ The IVCA also serves as a po%er"ul plat"orm "or investment "uns to interact %ith
each other$ In 2CCE' the total amount o" private e(uit! an venture capital in Inia reache
U/L;$D billion across 2>> eals$
91:
IVCA members comprise Venture capital "irms' Institutional investors' 3an#s' 3usiness
incubators' An&el investor &roups' 6inancial avisers' Accountants' La%!ers' <overnment
boies' Acaemic institutions an other service proviers to the venture capital an private
e(uit! inustr!$ Gembers represent most o" the active venture capital an private e(uit! "irms in
Inia$ These "irms provie capital "or see ventures' earl! sta&e companies' later sta&e
e,pansion' an &ro%th "inance "or mana&ement bu!)ins7bu!)outs o" establishe companies$ /o
"ar' the bi&&est member "irm o" IVCA is ICICI Ventures %hich currentl! has a L;DC million "un'
an has L?DC million uner mana&ement$
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VENTURE CAPITAL IN INDIA
CHAPTER 0
1EANIN( OF
"ENTURE CAPITA)
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VENTURE CAPITAL IN INDIA
Venture Capital is e"ine as proviin& see' start)up an "irst sta&e "inance to companies an
also "unin& e,pansion o" companies that have emonstrate business potential but o not have
access to public securities mar#et or other creit oriente "unin& institutions$
Venture Capital is &enerall! provie to "irms %ith the "ollo%in& characteristicsH
Ne%l! "loate companies that o not have access to sources such as e(uit! capital an7or
other relate instruments$
6irms' manu"acturin& proucts or services that have vast &ro%th potential$
6irms %ith above avera&e pro"itabilit!$
Novel proucts that are in the earl! sta&es o" their li"e c!cle$
Pro8ects involvin& above)avera&e ris#$
Turnaroun o" companies
Venture Capital erives its value "rom the bran e(uit!' pro"essional ima&e' constructive
criticism' omain #no%le&e' inustr! contactsB the! brin& to table at a si&ni"icantl! lo%er
mana&ement a&enc! cost$
A Venture Capital 6un 4VC65 strives to provie entrepreneurs %ith the support the! nee to
create up)scalable business %ith sustainable &ro%th' %hile proviin& their contributors %ith
outstanin& returns on investment' "or the hi&her ris#s the! assume$
The three primar! characteristics o" venture capital "uns %hich ma#e them eminentl! suitable as
a source o" ris# "inance areH
That it is e(uit! or (uasi e(uit! investment
It is lon& term investment an
It is an active "orm o" investment$
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VENTURE CAPITAL IN INDIA
"enture ca*italists
0hen someone re"ers to venture capitalist' the ima&e that comes in min is Gr$ Gone! ba&s$ 0e
all thin# o" venture capitalists as someone %ho is sittin& on millions o" ollars an %ho %ith the
%ave o" his ma&ic %an turns !our reams into realit!$ 0ell' i" that@s %hat !ou thin# is all about
%h! run a"ter him + Ipla! /anta !oursel"J
Venture Capitalists is li#e an! other pro"essional %ho is pai "or oin& his 8ob' !es' venture
capitalist is nothin& but a "un mana&er %hose 8ob is to mana&e "uns that are raise$ A venture
capitalist &ets a "ee to invest in companies that interest his investors$
Difference bet!een a "enture Ca*italist and 2an/ers31one% 1anaers,
3an#er is a mana&er o" other people@s mone! %hile the venture capitalist is basicall! an
investor$
Venture capitalist &enerall! invests in new ventures starte b! technocrats %ho &enerall! are
in nee o" entrepreneurial ai an "uns$
Venture capitalists &enerall! invest in companies that are not liste on an! stoc# e,chan&es$
The! ma#e pro"its onl! a"ter the compan! obtains listin&$
The most important i""erence bet%een a venture capitalist an conventional investors an
mutual "uns is that he is a specialist an lens mana&ement support an also
6inancial an strate&ic plannin&
Recruitment o" #e! personnel
Mbtain ban# an ebt "inancin&
Access to international mar#ets an technolo&!
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VENTURE CAPITAL IN INDIA
Introuction to strate&ic partners an ac(uisition tar&ets in the re&ion
Re&ional e,pansion o" manu"acturin& an mar#etin& operations
Mbtain a public listin&$
"ENTURE CAPITA) F)O- CHART&
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VENTURE CAPITAL IN INDIA
CHAPTER 4
AD"ANTA(E5 AND
DI5AD"ANTA(E5
OF "ENTURE
CAPITA)
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VENTURE CAPITAL IN INDIA
/ome avanta&es o" venture capital areH
15 Venture Capitalists 4VCs5 can provie a relativel! lar&e amount o" capital be"ore a
compan! &oes public$
25 Gan! VCs provie mana&erial or technical avice "or companies the! invest in$
-5 /uccess"ul VCs brin& le&itimac! to ne% ventures the! invest in$
?5 VCs ma! attract other investors$
/ome isavanta&es o" venture capital areH
15 The cost o" venture capital is hi&h$
25 Venture Capitalists are not patient investorsB per"ormance must meet or e,cee
e,pectations %ithin a speci"ic time$
-5 VCs are #no%n to ta#e control o" uner)per"ormin& companies$
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VENTURE CAPITAL IN INDIA
CHAPTER 6
"ENTURE
CAPITA) IN INDIA
1D
VENTURE CAPITAL IN INDIA
Institutionali7ation of "C in India
To establish the process o" institutionalisation o" Venture Capital 6unin& 4VC65 in Inia it is
important to e,amine the &ro%th o" this inustr! %ithin the conte,t o" the lar&er political an
economic s!stem$
The evelopment o" the venture capital inustr! in Inia in the 1>AC@s seeme almost utopian$
Inia@s hi&hl! bureaucratise econom!' a conservative social an business outloo# an a ris#
averse "inancial s!stem provie little encoura&ement an institutional space "or the venture
capital inustr! to avance$
The earliest mention o" venture capital came in 1>;-$ A committee appointe b! the Inian
&overnment to e,amine the promotion o" evelopment o" /GE@s hi&hli&hte the nee to enorse
venture capital as a source o" "unin& ne% entrepreneurs an technolo&!$
The Inian econom! is a ualistic econom!' ominate b! a "e% massive Public /ector
Unerta#in&s 4P/U@s5 on the one han an private sector inustr! &iants such as the Tatas an
3irlas on the other$ An entrepreneur startin& a sunrise inustr! %oul have to o so on his o%n
personal savin&s or loans raise throu&h personal contacts an "inancial institutions$
In 1>AA' the 0orl 3an#' encoura&in& economic liberali*ation in thir %orl countries'
unertoo# a stu! to e,amine the possibilit! o" evelopin& venture capital "unin& chie"l! in the
private sector$ Accorin&l!' the Inian &overnment issue its "irst &uielines to le&alise venture
capital operations$ The! allo%e state controlle ban#s an "inancial institutions to establish
venture capital subsiiaries$ As a result venture capital "unin& became an e,tension "or
evelopin& "inancial institutions such as ICICI' ID3I' /ID3I' an /tate 6inance Corporations$
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VENTURE CAPITAL IN INDIA
In the absence o" an inepenent an or&ani*e venture capital inustr! in Inia until almost
1>>A' iniviual investors an evelopmental "inancial institutions pla!e the role o" venture
capitalists$ Entrepreneurs %ere lar&el! epenent on private placements' public o""erin&s an
lenin& b! "inancial institutions$
The ro!th of the venture ca*ital industr% in India can be divided into '
*hases,
The first *hase be&an post +re"orm %ith liberali*ation o" the Inian econom!$ The Technical
Development an In"ormation Corporation o" Inia 4TDICI' no% ICICI ventures5 an the
<u8arat Venture 6inance Limite 4<V6L5 %ere set up$ /ources o" these "uns %ere "inancial
institutions' "orei&n institutional investors or pension "uns an hi&h net)%orth iniviuals$
The second *hase o" venture capital &ro%th in Inia be&an %ith the reali*ation that venture
capital "unin&' as an inustr! has to be re&ulate$ /ubse(uentl!' the <overnment o" Inia issue
&uielines in /eptember 1>>D "or overseas investment in venture capital in Inia$
In 1>>E' the /ecurities an E,chan&e 3oar o" Inia 4/E3I5 came out %ith &uielines "or
venture capital "uns$ The move liberate the inustr! "rom a number o" bureaucratic hassles an
pave the %a! "or &reater access to capital$ Goreover' competition brou&ht pro"essional business
practices "rom the mature mar#ets in the %est$
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VENTURE CAPITAL IN INDIA
In 1>>;' venture capital "unin& became prominent in the IT sector$ All venture capital "uns that
%ere as o" then bein& emplo!e in other sectors' chan&e their "ocus to the IT an Telecom
inustr!$
0ith the IT boom toa!' the Inian venture capital inustr! has "inall! turne the curve$
1o%ever it is still strivin& har to success"ull! an %holl! ta#e o""$
Durin& the recession "rom 1>>> + 2CC1 most o" the venture capitalists either close o%n or
shi"te "ocus$ Almost all o" them %ith the e,ception o" one or t%o li#e <v6L centere on
success"ul "irms "or their &ro%th an e,pansion$ Venture capital "irms also &ot en&a&e into
"unin& bu!outs' privati*ation an restructurin&$ Currentl!' 8ust a "e% "irms are ta#in& the ris# o"
investin& into the start)up technolo&! base companies$
The success achieve in the IT sector' has encoura&e VC6 in several other sectors li#e bio)
technolo&!' pharmaceuticals an ru&s' a&riculture' "oo processin&' telecommunications' call
centers' business process outsourcin& 43PM5 an services$ 0ith proper polic! support an
"inancin& o" ris# capital' entrepreneurship in small an meium sector can succee$
/tate <overnments have no% starte ta#in& an active part in the venture capital Inustr!$ /tates
li#e Anhra Praesh have APIDC)VCL' %hich is a 8oint venture bet%een the Ventureast <roup
an the Anhra Praesh Inustrial Development Corporation "unin& /GE@s li#e bio)technolo&!
"irms' pharma etc$
6irst)&eneration entrepreneurs are no% "inin& it easier to raise venture "uns$ Gore venture
"uns are no% bein& investe in lo% technolo&! enterprise as is seen in the case o" ICICI
Ventures that has a sta#e in /hoppers /top$
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VENTURE CAPITAL IN INDIA
There are a number o" "uns' %hich are currentl! operational in Inia an involve in "unin&
start)up ventures$ Gost o" them are not true venture "uns' as the! o not "un start)ups$ 0hat
the! o is provie me**anine or bri&e "unin& an are better #no%n as private e(uit! pla!ers$
1o%ever' there is a stron& optimistic unertone in the air$ 0ith the Inian #no%le&e inustr!
"inall! sho%in& si&ns o" reainess to%ars competin& &loball! an a%areness o" venture
capitalists amon& entrepreneurs hi&her than ever be"ore' the sta&e seems all set "or an overrive$
The Inian Venture Capital Association 4IVCA5' is the noal center "or all venture activit! in the
countr!$ The association %as set up in 1>>2 an over the last "e% !ears' has built up an
impressive atabase$ Accorin& to the IVCA' the pool o" "uns available "or investment to its 2C
members in 1>>; %as Rs2D$Ebn$ Mut o" this' Rs1C bn ha been investe in E>1 pro8ects$
Certain venture capital "uns are Inustr! speci"ic4ie the! "un enterprises onl! in certain
inustries such as pharmaceuticals' in"otech or "oo processin&5 %hereas others ma! have a
much %ier spectrum$ A&ain' certain "uns ma! have a &eo&raphic "ocus + li#e Uttar Praesh'
Gaharashtra' 2erala' etc %hereas others ma! "un across i""erent territories$ The "uns ma! be
either close)eneschemes 4%ith a "i,e perio o" maturit!5 or open)ene$ The &ro%th o"
venture capital in Inia "rom 2CCC)2CCE is as "ollo%sH
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VENTURE CAPITAL IN INDIA
As in the above chart' it is observe that venture capital ha a &reat "all "rom 2CCC to 2CC- "rom
U/L 2AC million to U/L DE million$ 2CC? %as a &oo start "rom venture capital in Inia$ An
there more chances o" increase in venture capital in Inia$
These are venture capital companies in Inia$
Accel Partners Inia
Artheon Ventures
Artiman Ventures
Au&ust Capital Partners
3lueRun Ventures
D6K Inia
Epiphan! Ventures
1elion Venture Partners
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VENTURE CAPITAL IN INDIA
I6CI Venture Capital 6uns
Inia Innovation Investors
In"raCo Asia Development Pte Lt$
Inventus 4Inia5 Avisor! Compan!
KA6CM Asia
Net* Capital
Ne,us Inia Capital
Nirvana Venture Avisors
M8as Venture Partners
Reliance Venture
/AI6 Partners
/e(uoia Capital
/ri8an Capital
Tuscan Ventures
Trient Capital
Veis Ventures
VentureEast
Lambtech Ventures
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VENTURE CAPITAL IN INDIA
CHAPTER 8
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VENTURE CAPITAL IN INDIA
T9PE5 OF
"ENTURE
CAPITA)
IN"E5TOR5
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VENTURE CAPITAL IN INDIA
The :venture funds; available could be fro$
Incubators
Anel investors
"enture Ca*italists <"Cs=
Private E>uit% Pla%ers
Incubators
An incubator is a harcore technocrat %ho %or#s %ith an entrepreneur to evelop a business
iea' an prepares a compan! "or subse(uent rouns o" &ro%th . "unin&$ E-Ventures, Infinity is
e,amples o" incubators in Inia$
Anel Investors
An an&el is an e,perience inustr!)bre iniviual %ith hi&h net %orth$
T!picall!' an an&el investor %oulH
Invest onl! his chosen "iel o" technolo&!
Ta#e active participation in a!)to)a! runnin& o" the compan!
Invest small sums in the ran&e o" U/D 1)- million
Not insist on etaile business plans
/anction the investment in up to a month
1elp compan! "or Isecon rounJ o" "unin&
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VENTURE CAPITAL IN INDIA
The INDU/ Entrepreneurs 4TiE5 is a classic &roup o" an&els li#eH Vino ham' /ailesh Gehta'
2an%al Re#hi' Prabhu <oel' /uhas Patil' Pra#ash A&ra%al' 2$3 Chanrashe#har$ In Inia there
is a lac# o" home &ro%n an&els e,cept a "e% li#e /aurabh /rivastava . Atul Cho#se! 4e,) Asian
paints5$
"enture Ca*italists <"Cs=
VCs are or&ani*ations raisin& "uns "rom numerous investors . hirin& e,perience pro"essional
mana&ers to eplo! the same$ The! t!picall!H
Invest at IseconJ sta&e
Invest over a spectrum over inustr!7ies
1ave han)holin& ImentorJ approach
Insist on etaile business plans
Invest into proven ieas7businesses
Provie IbranJ value to investee
Invest bet%een U/D 2)D million
Private E>uit% Pla%ers
The! are establishe investment ban#ers$ T!picall!H
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VENTURE CAPITAL IN INDIA
Invest into proven7establishe businesses
1ave I"inancial partnersJ approach
Invest bet%een U/D D) 1CC million
CHAPTER ?
C)A55IFICATION
OF "ENTURE
CAPITA) FUND5
2E
VENTURE CAPITAL IN INDIA
"enture funds in India can be classified on the basis ofH
2ase for$ation
Financial Institutions Led By ICICI Ventures, RCTC, ILFS, etc.
Private venture "uns li#e Inus' etc$
Re&ional "uns li#e 0arbur& Pincus' K6 Electra 4mostl! operatin& out o" 1on& 2on&5$
Re&ional "uns eicate to Inia li#e Draper' 0alen' etc$
M""shore "uns li#e 3arin&s' TC0' 1/3C' etc$
Corporate ventures li#e Intel$
To this list %e can a An&els li#e /ivan /ecurities' Atul Cho#se! 4e, Asian Paints5 an others$
Gerchant ban#ers an N36Cs %ho speciali*e in Nbou&ht outN eals also "un companies$ Gost
merchant ban#ers le b! Enam /ecurities no% invest in IT companies$
Invest$ent Philoso*h%
Earl! sta&e "unin& is avoie b! most "uns apart "rom ICICI ventures' Draper' /ID3I an
An&els$ 6unin& &ro%th or me**anine "unin& till pre IPM is the se&ment %here most pla!ers
operate$ In this conte,t' most "uns in Inia are private e(uit! investors$
5i7e Of Invest$ent
The si*e o" investment is &enerall! less than U/L1mn' U/L1)Dmn' U/LD)1Cmn' an &reater than
U/L1Cmn$ As most "uns are o" a private e(uit! #in' si*e o" investments has been increasin&$
IT companies &enerall! re(uire "uns o" about Rs-C)?Cmn in an earl! sta&e %hich "all outsie
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VENTURE CAPITAL IN INDIA
"unin& limits o" most "uns an that is %h! the &overnment is promotin& schemes to "un start
ups in &eneral' an in IT in particular$
"alue Addition )
The venture "uns can have a totall! Nhans onN approach to%ars their investment li#e Draper
or Nhans o""N li#e Chase$ ICICI Ventures "alls in the limite e,posure cate&or!$ In &eneral'
venture "uns %ho "un see or start ups have a closer interaction %ith the companies an avice
on strate&!' etc %hile the private e(uit! "uns treat their e,posure li#e an! other liste
investment$ This is partiall! 8usti"ie' as the! ten to invest in more mature stories$
A list o" the members re&istere %ith the IVCA as o" Kune 1>>>' has been provie in the
Anne,ure$ 1o%ever' in aition to the or&ani*e sector' there are a number o" pla!ers operatin&
in Inia %hose activit! is not monitore b! the association$ A to&ether the in"usion o" "uns b!
overseas "uns' private iniviuals' Oan&el@ investors an a host o" "inancial intermeiaries an
the total pool o" Inian Venture Capital toa!' stans at RsDCbn' accorin& to inustr! estimatesP
The primar! mar#ets in the countr! have remaine epresse "or (uite some time no%$ In the last
t%o !ears' there have been 8ust ;? initial public o""erin&s 4IPMs5 at the stoc# e,chan&es' leain&
to an investment o" 8ust Rs1?$2?bn$ That@s less than 12Q o" the mone! raise in the previous t%o
!ears$ That ma#es the conservative estimate o" Rs-Ebn investe in companies throu&h the
Venture Capital7private E(uit! route all the more si&ni"icant$
/ome o" the companies that have receive "unin& throu&h this route inclueH
Gaste#' one o" the olest so"t%are houses in Inia
<eometric /o"t%are'a proucer o" so"t%are solutions "or the CAD7CAG mar#et
Ru#sun /o"t%are' Pune)base so"t%are consultanc!
2A
VENTURE CAPITAL IN INDIA
/FL /tar' 1!eraba base trainin& an so"t%are evelopment compan!
Gicrolan' net%or#in& har%are an services compan! base in 3an&alore
/at!am In"o%a!' the "irst private I/P in Inia
1initron' ma#ers o" embee so"t%are
Po%erTel 3oca' istributor o" telecomputin& proucts "or the Inian mar#et
Rei"" on the Net' Inian %ebsite "eaturin& electronic shoppin&' ne%s' chat' etc
Entevo' securit! an enterprise resource mana&ement so"t%are proucts
Planetasia$com' Gicrolan@s subsiiar!' one o" Inia@s leain& portals
Torrent Net%or#in&' pioneer o" <i&abit)scale IP routers "or inter7intra nets
/electica' provier o" interactive so"t%are selection
Thou&h the in"otech companies are amon& the most "avore b! venture capitalists'
companies "rom other sectors also "eature e(uall! in their port"olios$ The healthcare
sector %ith pharmaceutical' meical appliances an biotechnolo&! inustries also &et
much attention in Inia$ 0ith the ere&ulation o" the telecom sector'
telecommunications inustries li#e Rip Telecom an meia companies li#e UTV an
Television Ei&hteen have 8oine the list o" "avorites$ /o "ar' these trens have been in
#eepin& %ith the &lobal course$
1o%ever' recent evelopments have sho%n that Inia is maturin& into a more
evelope mar#etplaceB unconventional investments in a &amut o" inustries have
sprun& up all over the countr!$ This incluesH
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VENTURE CAPITAL IN INDIA
Inus Lea&ue Clothin&' a compan! set up b! ei&ht "ormer emplo!ees o" rea!mae
&arments &iant Gaura' %ho set up shop on their o%n to evelop a uni(ue virtual
or&ani*ation that %ill license &lobal apparel brans an sell them' %ithout o%nin& an!
manu"acturin& units$ The! ream to buil a net%or# o" 2'DCC outlets in three !ears
an to be amon& the top three rea!mae brans$
/hoppers /top' Gumbai@s premier epartmental store innovates %ith retailin& an
ecies to &o &lobal$ This eal is "acin& some problems in &ettin& re&ulator!
approvals$
Air"rei&ht, the courier)compan! %hich has been &ro%in& at a rapi pace an neee
"uns "or heav! investments in technolo&!' net%or#in& an aircra"ts$
Pi**a Corner' a Chennai base pi**a eliver! compan! that is set to ta#e on &lobal
&iants li#e Pi**a 1ut an Dominos Pi**a %ith its innovative servicin& strate&!$
Consortiu$ financin
0here the pro8ect cost is hi&h 4Rs 1CC million or more5 an a sin&le "un is not in a
position to provie the entire venture capital re(uire then venture "uns mi&ht act in
consortium %ith other "uns an ta#e a lea in ma#in& investment ecisions$ This
helps in iversi"!in& ris# but ho%ever it has not been ver! success"ul in the Inia
case$
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VENTURE CAPITAL IN INDIA
CHAPTER @
5TA(E5 OF
FINANCIN( 29
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VENTURE CAPITAL IN INDIA
"ENTURE
CAPITA)I5T
-2
VENTURE CAPITAL IN INDIA
Venture capital can be provie to companies at different staes$ These inclueH
I, Earl%A stae Financin
5eed Financin& /ee "inancin& is provie "or prouct evelopment . research an to
buil a mana&ement team that primaril! evelops the business plan$
5tartu* Financin& A"ter initial prouct evelopment an research is throu&h' startup
"inancin& is provie to companies to or&ani*e their business' be"ore the commercial launch o"
their proucts$
First 5tae Financin& Is provie to those companies that have e,hauste their initial
capital an re(uire "uns to commence lar&e)scale manu"acturin& an sales$
II, EB*ansion Financin
5econd 5tae Financin& This t!pe o" "inancin& is available to provie %or#in& capital
"or initial e,pansion o" companies' that are e,periencin& &ro%th in accounts receivable an
inventories' an is on the path o" pro"itabilit!$
1e77anine Financin& 0hen sales volumes increase tremenousl!' the compan!'
throu&h me**anine "inancin& is provie %ith "uns "or "urther plant e,pansion' mar#etin&'
%or#in& capital or "or evelopment o" an improve prouct$
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VENTURE CAPITAL IN INDIA
2ride Financin& 3ri&e "inancin& is provie to companies that plan to &o public
%ithin si, to t%elve months$ 3ri&e "inancin& is repai "rom uner%ritin& procees$
III, Ac>uisition Financin
As the term enotes' this t!pe o" "unin& is provie to companies to ac(uire another compan!$
This t!pe o" "inancin& is also #no%n as bu!out "inancin&$ It is normall! avisable to approach
more than one venture capital "irm simultaneousl! "or "unin&' as there is a possibilit! o" ela!
ue to the various (ueries put b! the VC$ I" the application "or "unin& %ere "inall! re8ecte then
approachin& another VC at that point an &oin& throu&h the same process %oul cause ela!$ I"
more than one VC revie%s the business plan this ela! can be avoie' as the probabilit! o"
acceptance %ill be much hi&her$ The onl! problem %ith the above strate&! is the processin& "ee
re(uire b! a VC alon& %ith the business plan$ I" !ou %ere appl!in& to more than one VC then
there %oul be a cost escalation "or processin& the application$ 1ence a cost bene"it anal!sis
shoul be &one into be"ore usin& the above strate&!$
Normall! the revie% o" the business plan %oul ta#e a ma,imum o" one month an isbursal "or
the "uns to reach the entrepreneur it %oul ta#e a minimum o" - months to a ma,imum o" E
months$ Mnce the initial screenin& an evaluation is over' it is avisable to have a person %ith
"inance bac#&roun li#e a "inance consultant to ta#e care o" etails li#e ne&otiatin& the pricin&
an structurin& o" the eal$ M" course alternativel! one can involve a "inancial consultant ri&ht
"rom the be&innin& particularl! %hen the entrepreneur oes not have a mana&ement bac#&roun$
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VENTURE CAPITAL IN INDIA
CHAPTER C
CORPORATE
"ENTURIN(
<IN"E5T1ENT
PROCE55=

-D
VENTURE CAPITAL IN INDIA
"ENTURE CAPITA) PROCE55 CHART
Even thou&h investor an the entire process that &oes into the %ooin& the venture capital %ith
!our plan$
6irst' !ou nee to %or# out a business plan$ The business plan is a ocument that outlines the
mana&ement team' prouct' mar#etin& plan' capital costs an means o" "inancin& an
pro"itabilit! statements$
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VENTURE CAPITAL IN INDIA
The venture capital investment process has variances7"eatures that are conte,t speci"ic an var!
"rom inustr!' timin& an re&ion$ 1o%ever' activities in a venture capital "un "ollo% a t!pical
se(uence$ The t!pical sta&es in an investment c!cle are as belo%H
<eneratin& a eal "lo%
Due ili&ence
Investment valuation
Pricin& an structurin& the eal
Value Aition an monitorin&
E,it
ID (eneratin A Deal Flo!
In &eneratin& a eal "lo%' the venture capital investor creates a pipeline o" Oeals@ or investment
opportunities that he %oul consier "or investin& in$ This is achieve primaril! throu&h
plu&&in& into an appropriate net%or#$ The most popular net%or# obviousl! is the net%or# o"
venture capital "uns7investors$
It is also common "or venture capitals to evelop %or#in& relationships %ith R.D institutions'
acaemia' etc' %hich coul potentiall! lea to business opportunities$ Unerstanabl! the
composition o" the net%or# %oul epen on the investment "ocus o" the venture capital
"uns7compan!$ Thus venture capital "uns "ocussin& on earl! sta&e technolo&! base eals
%oul evelop a net%or# o" R.D centers %or#in& in those areas$ The net%or# is crucial to the
success o" the venture capital investor$ It is almost imperative "or the venture capital investor to
receive a lar&e number o" investment proposals "rom %hich he can select a "e% &oo investment
caniates "inall!$ /uccess"ul venture capital investors in the U/A e,amine hunres o" business
-;
VENTURE CAPITAL IN INDIA
plans in orer to ma#e three or "our investments in a !ear$)It is important to note the i""erence
bet%een the pro"ile o" the investment opportunities that a venture capital %oul e,amine an
those pursue b! a conventional creit oriente a&enc! or an investment institution$ 3!
e"inition' the venture capital investor "ocuses on opportunities %ith a hi&h e&ree o" innovation$
The eal "lo% composition an the techni(ue o" &eneratin& a eal "lo% can var! "rom countr! to
countr!$ In Inia' i""erent venture capital "uns7companies have their o%n methos var!in&
"rom promotional seminars %ith R.D institutions an inustr! associations to irect avertisin&
campai&ns tar&ete at various se&ments$ A clear pattern bet%een the investment "ocus o" a "un
an the constitution o" the eal &eneration net%or# is iscernible even in the Inian conte,t$
IID Due Dilience
Due ili&ence is the inustr! 8ar&on "or all the activities that are associate %ith evaluatin& an
investment proposal$ It inclues carr!in& out re"erence chec#s on the proposal relate aspects
such as mana&ement team' proucts' technolo&! an mar#et$
The important "eature to note is that venture capital ue ili&ence "ocuses on the (ualitative
aspects o" an investment opportunit!$ It is also not unusual "or venture capital "un7companies to
set up an Oinvestment screen@$ The screen is a set o" (ualitative 4sometimes (uantitative criteria
such as revenue are also use5 criteria that help venture capital "uns7companies to (uic#l!
ecie on %hether an investment opportunit! %arrants "urther ili&ence$ /creens can be
sometimes elaborate an ri&orous an sometimes speci"ic an brie"$
The nature o" screen criteria is also a "unction o" investment "ocus o" the "irm at that point$
Venture capital investors rel! e,tensivel! on re"erence chec#s %ith Oleain& li&hts@ in the speci"ic
areas o" concern bein& aresse in the ue ili&ence$
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VENTURE CAPITAL IN INDIA
A venture capitalist tries to ma,imi*e the upsie potential o" an! pro8ect$ 1e tries to structure his
investment in such a manner that he can &et the bene"it o" the upsie potential ie he %oul li#e to
e,it at a time %hen he can &et ma,imum return on his investment in the pro8ect$ 1ence his ue
ili&ence appraisal has to #eep this "act in min$
Ne% 6inancin&
/ometimes' companies ma! have e,perience operational problems urin& their earl! sta&es o"
&ro%th or ue to ba mana&ement$ These coul result in losses or cash "lo% rains on the
compan!$ /ometimes "inancin& "rom venture capital ma! en up bein& use to "inance these
losses$ The! avoi this throu&h ue ili&ence an scrutin! o" the business plan$
Inter)Compan! Transactions
0hen investments are mae in a compan! that is part o" a &roup' inter)compan! transactions
must be anal!*e$
IIID Invest$ent "aluation
The investment valuation process is an e,ercise aime at arrivin& at Oan acceptable price@ "or the
eal$ T!picall! in countries %here "ree pricin& re&imes e,ist' the valuation process &oes throu&h
the "ollo%in& stepsH
Evaluate "uture revenue an pro"itabilit!
6orecast li#el! "uture value o" the "irm base on e,perience mar#et capitali*ation or
e,pecte ac(uisition procees epenin& upon the anticipate e,it "rom the investment$
Tar&et an o%nership position in the investee "irm so as to achieve esire appreciation on the
propose investment$ The appreciation esire shoul !iel a hurle rate o" return on a
Discounte Cash 6lo% basis$
->
VENTURE CAPITAL IN INDIA
/!mbolicall! the valuation e,ercise ma! be represente as "ollo%sH
NPV S 94Cash574Post5: , 94PAT , PER5: , #' %here
NPV S Net Present Value o" the cash "lo%s relatin& to the investment comprisin& out"lo% b!
%a! o" investment an in"lo%s b! %a! o" interest7iviens 4i" an!5 an reali*ation on e,it$ The
rate o" return use "or iscountin& is the hurle rate o" return set b! the venture capital investor$
Post S Pre T Cash
Cash represents the amount o" cash bein& brou&ht into the particular roun o" "inancin& b!
the venture capital investor$
OPre@ is the pre)mone! valuation o" the "irm estimate b! the investor$ 0hile technicall! it is
measure b! the intrinsic value o" the "irm at the time o" raisin& capital$ It is more o"ten a matter
o" ne&otiation riven b! the o%nership o" the compan! that the venture capital investor esires
an the o%nership that "ouners7mana&ement team is prepare to &ive a%a! "or the re(uire
amount o" capital
PAT is the "orecast Pro"it a"ter ta, in a !ear an o"ten a&ree upon b! the "ouners an the
investors 4as oppose to bein& Oarrive at@ unilaterall!5$ It %oul also be the net o" pre"erre
iviens' i" an!$
PER is the Price)Earnin& multiple that coul be e,pecte o" a comparable "irm in the
inustr!$ It is not al%a!s possible to "in such a Ocomparable "it@ in venture capital situations$
That necessitates' there"ore' a si&ni"icant e&ree o" 8u&ement on the part o" the venture capital
to arrive at alternate PER scenarios$
O#@ is the present value interest "actor 4corresponin& to a iscount rate Or@5 "or the investment
hori*on$
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VENTURE CAPITAL IN INDIA
It is (uite apparent that PER time PAT represents the value o" the "irm at that time an the
complete e,pression reall! represents the investor@s share o" the value o" the investee "irm$ The
"ollo%in& e,ample illustrates this "rame%or#H
E,ampleH 3est Gousetrap Limite 43GL5 has evelope a protot!pe that nees to be
commerciali*e$ 3GL nees cash o" Rs2mn to establish prouction "acilities an set up a
mar#etin& pro&ram$ 3GL e,pects the compan! %ill &o public in the thir !ear an have
revenues o" Rs;Cmn an a PAT mar&in o" 1CQ on sales$ Assume' "or the sa#e o" convenience
that there %oul be no "urther aition to the e(uit! capital o" the compan!$
Pruent 6un Gana&ers 4P6G5 propose to lea a s!nicate o" li#e mine investors %ith a
hurle rate o" return o" ;DQ 4iscounte5 over a "ive !ear perio base on 3GL@s sales an
pro"itabilit! e,pectations$ 6irms %ith comparable sales an pro"itabilit! an ris# pro"iles trae at
12 times earnin&s on the stoc# e,chan&e$ The "ollo%in& %oul be the se(uence o" computationsH
In orer to &et a ;DQ return p$a$ the initial investment o" Rs2 million must !iel an accumulation
o" 2 , 41$;D5
D
S Rs-2$Amn on isinvestment in !ear D$
3GL@s mar#et capitali*ation in "ive !ears is li#el! to be Rs 4;C , C$1 , 125 million S RsA?mn$
Percenta&e o%nership in 3GL that is re(uire to !iel the esire accumulation %ill be 4-2$A7A?5
, 1CC S ->Q
There"ore the post mone! valuation o" 3GL At the time o" raisin& capital %ill be e(ual to
Rs427C$->5 million S RsD$1 million %hich implies that a pre)mone! valuation o" Rs-$1 million "or
3GL
Another popular variant o" the above metho is the 6irst Chica&o Getho 46CG5 evelope b!
/tanle! <oler' a leain& pro"essional venture capital mana&er$ 6CG assumes three possible
scenarios + Osuccess@' Osie%a!s survival@ an O"ailure@$ Mutcomes uner these three scenarios are
?1
VENTURE CAPITAL IN INDIA
probabilit! %ei&hte to arrive at an e,pecte rate o" returnHIn realit! the valuation o" the "irm is
riven b! a number o" "actors$ The more si&ni"icant amon& these areH
Mverall economic conitionsH A buo!ant econom! prouces an optimistic lon&) term outloo# "or
ne% proucts7services an there"ore results in more liberal pre)mone! valuations$
Deman an suppl! o" capitalH %hen there is a surplus o" venture capital o" venture capital
chasin& a relativel! limite number o" venture capital eals' valuations &o up$ This can result in
unhealth! levels o" lo% returns "or venture capital investors$
/peci"ic rates o" ealsH such as the "ouner@s7mana&ement team@s trac# recor' innovation7
uni(ue sellin& propositions 4U/Ps5' the prouct7service si*e o" the potential mar#et' etc a""ects
valuations in an obvious manner$
The e&ree o" popularit! o" the inustr!7technolo&! in (uestion also in"luences the pre)
mone!$ Computer Aie /#ills /o"t%are En&ineerin& 4CA/E5 tools an Arti"icial Intelli&ence
%ere one time arlin&s o" the venture capital communit! that have no% &iven place to biotech
an retailin&$
The stanin& o" the iniviual venture capital 0ell establishe venture capitals %ho are
sou&ht a"ter b! entrepreneurs "or a number o" reasons coul &et a%a! %ith ti&hter valuations than
their less #no%n counterparts$
Investor@s consierations coul var! si&ni"icantl!$ A stu! b! an American venture capital'
OVentureMne@' reveale the "ollo%in& tren$ Lar&e corporations %ho invest "or strate&ic
avanta&es such as access to technolo&ies' proucts or mar#ets pa! t%ice as much as a
pro"essional venture capital investor' "or a &iven o%nership position in a compan! but onl! hal"
as much as investors in a public o""erin&$
Valuation o""ere on comparable eals aroun the time o" investin& in the eal$
?2
VENTURE CAPITAL IN INDIA
Fuite obviousl!' valuation is one o" the most critical activities in the investment process$ It
%oul not be improper to sa! that the success "or a "un %ill be etermine b! its abilit! to
value7price the investments correctl!$
/ometimes the valuation process is broal! base on thumb rule metrics such as multiple o"
revenue$ Thou&h such methos %oul appear rou&h an rea!' the! are o"ten base on "airl! %ell
establishe inustr! avera&es o" operatin& pro"itabilit! an assets7capital turnover ratios
/uch valuation as outline above is possible onl! %here complete "reeom o" pricin& is
available$ In the Inian conte,t' %here until recentl!' the pricin& o" e(uit! issues %as heavil!
re&ulate' un"ortunatel! valuation %as heavil! constraine$
I"D 5tructurin A Deal
/tructurin& re"ers to puttin& to&ether the "inancial aspects o" the eal an ne&otiatin& %ith the
entrepreneurs to accept a venture capital@s proposal an "inall! closin& the eal$ To o a &oo 8ob
in structurin&' one nees to be #no%le&eable in areas o" accountin&' cash "lo%' "inance' le&al
an ta,ation$ Also the structure shoul ta#e into consieration the various commercial issues 4ie
%hat the entrepreneur %ants an %hat the venture capital %oul re(uire to protect the
investment5$ Documentation re"ers to the le&al aspects o" the paper%or# in puttin& the eal
to&ether$
The instruments to be use in structurin& eals are man! an varie$ The ob8ective in selectin&
the instrument %oul be to ma,imi*e 4or optimi*e5 venture capital@s returns7protection an !et
satis"! the entrepreneur@s re(uirements$ The instruments coul be as "ollo%sH
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VENTURE CAPITAL IN INDIA
Instrument Issues
Loan clean vs secure
Interest bearin& vs non interest bearin&
convertible vs one %ith "eatures 4%arrants5
1st Char&e' 2n Char&e'
/toc# maturit!
Pre"erence shares reeemable 4conitions uner Compan! Act5
Participatin&
Par value
nominal shares
0arrants e,ercise price' e,pir! perio
Common shares Ne% or venor shares
Par value
partiall!)pai shares
Mptions e,ercise price' e,pir! perio' call' put
In Inia' strai&ht e(uit! an convertibles are popular an commonl! use$ No%aa!s' %arrants
are issue as a tool to brin& o%n pricin&$
A variation that %as "irst use b! PACT an TDICI %as Nro!alt! on salesN$ Uner this' the
compan! %as &iven a conitional loan$ I" the pro8ect %as success"ul' the compan! ha to pa! a
Q a&e o" sales as ro!alt! an i" it "aile then the amount %as %ritten o""$
In structurin& a eal' it is important to listen to %hat the entrepreneur %ants' but the venture
capital comes up %ith his o%n solution$ Even "or the propose investment amount' the venture
capital ecies %hether or not the amount re(ueste' is appropriate an consistent %ith the ris#
level o" the investment$ The ris#s shoul be anal!*e' ta#in& into consieration the sta&e at
%hich the compan! is in an other "actors relatin& to the pro8ect$ 4e& e,it problems' etc5$
Promoter /hares
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VENTURE CAPITAL IN INDIA
As venture capital is to "inance &ro%th' venture capital investment shoul ieall! be use "or
"inancin& e,pansion pro8ects 4e& ne% plant' capital e(uipment' aitional %or#in& capital5$ Mn
the other han' entrepreneurs ma! %ant to sell a%a! part o" their interests in orer to loc#)in a
pro"it "or their %or# in builin& up the compan!$ In such a case' the structurin& ma! inclue
some venor shares' %ith the bul# o" "inancin& &oin& into bu!in& ne% shares to "inance &ro%th$
1anlin& Director@s An /hareholer@s Loans
6re(uentl!' a compan! has e,istin& irector@s an shareholer@s loans prior to invitin& venture
capitalists to invest$ As the mone! "rom venture capital is put into the compan! to "inance
&ro%th' it is pre"erable to structure the eal to re(uire these loans to be repai bac# to the
shareholers7irectors onl! upon IPMs7e,its an at some mutuall! a&ree perio 4e& 1 or 2 !ears
a"ter investment5$ This %ill increase the "inancial commitment o" the entrepreneur an the
shareholers o" the pro8ect$
A t!pical proposal ma! inclue a combination o" several i""erent instruments liste above$
Uner normal circumstances' entrepreneurs %oul pre"er venture capitals to invest in e(uit! as
this %oul be the lo%est ris# option "or the compan!$ 1o%ever "rom the venture capitals point o"
vie%' the sa"est instrument' but %ith the least return' %oul be a secure loan$ 1ence' ultimatel!'
%hat !ou en up %ith %oul be some instruments in bet%een %hich are sol to the entrepreneur$
"D 1onitorin and Follo! U*
The role o" the venture capitalist oes not stop a"ter the investment is mae in the pro8ect$ The
s#ills o" the venture capitalist are most re(uire once the investment is mae$ The venture
capitalist &ives on&oin& avice to the promoters an monitors the pro8ect continuousl!$
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VENTURE CAPITAL IN INDIA
It is to be unerstoo that the proviers o" venture capital are not 8ust "inanciers or subscribers to
the e(uit! o" the pro8ect the! "un$ The! "unction as a ual capacit!' as a "inancial partner an
strate&ic avisor$
Venture capitalists monitor an evaluate pro8ects re&ularl!$ The! #eep a han on the pulse o" the
pro8ect$ The! are activel! involve in the mana&ement o" the o" the investee unit an provie
e,pert business counsel' to ensure its survival an &ro%th$ Deviations or causes o" %orr! ma!
alert them to potential problems an the! can su&&est remeial actions or measures to avoi
these problems$ As pro"essional in this uni(ue metho o" "inancin&' the! ma! have innovative
solutions to ma,imi*e the chances o" success o" the pro8ect$ A"ter all' the ultimate aim o" the
venture capitalist is the same as that o" the promoters + the lon& term pro"itabilit! an viabilit! o"
the investee compan!$
"ID EBit
Mne o" the most crucial issues is the e,it "rom the investment$ A"ter all' the return to the venture
capitalist can be reali*e onl! at the time o" e,it$ E,it "rom the investment varies "rom the
investment to investment an "rom venture capital to venture capital$ There are several e,it
routes' bu!)buc# b! the promoters' sale to another venture capitalist or sale at the time o" Initial
Public M""erin&' to name a "e%$ In all cases specialists %ill %or# out the metho o" e,it an
ecie on %hat is most pro"itable an suitable to both the venture capitalist an the investee unit
an the promoters o" the pro8ect$
At present man! investments o" venture capitalists in Inia remain on paper as the! o not have
an! means o" e,it$ Appropriate chan&es have to be mae to the e,istin& s!stems in orer that
venture capitalists "in it easier to reali*e their investments a"ter holin& on to them "or a certain
perio o" time$ This "actor is even more critical to smaller an mi si*e companies' %hich are
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VENTURE CAPITAL IN INDIA
unable to &et liste on an! stoc# e,chan&e' as the! o not meet the minimum re(uirements "or
such listin&s$ /toc# e,chan&es coul consier ho% the! coul assist in this matter "or listin& o"
companies #eepin& in min the re(uirement o" the venture capital inustr!$
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VENTURE CAPITAL IN INDIA
CHAPTER 1E
ACCE55IN(
"ENTURE CAPITA)
UNDERTAFIN(
?A
VENTURE CAPITAL IN INDIA
Venture "uns' both omestic an o""shore' have been aroun in Inia "or some !ears no%$
1o%ever it is onl! in the past 12 to 1A months' the! have come into the limeli&ht$ The re8ection
ratio is ver! hi&h' about 1C in 1CC &et be!on pre evaluation sta&e' an I &et "une$
Venture capital "uns are broal! o" t%o #ins + &eneralists or specialists$ It is critical "or the
compan! to access the ri&ht t!pe o" "un' i$e$ %ho can a value$ This bac#in& is invaluable as
"ocuse 7 speciali*e "uns open oors'assist in "uture rouns an help in strate&!$ 1ence' it is
important to choose the ri&ht venture capitalist$
The stanar parameters use b! venture capitalists are ver! similar to an! investment ecision$
The onl! i""erence bein& e,it$ I" one bu!s a liste securit!' one can e,it at a price but %ith an
unliste securit!' e,it becomes i""icult$ The #e! "actors %hich the! loo# "or in
The 1anae$ent
Gost businesses are people riven' %ith success or "ailure epenin& on the per"ormance o" the
team$ It is important to istin&uish the entrepreneur "rom the pro"essional mana&ement team$ The
value o" the iea' the vision' puttin& the team to&ether' &ettin& the "unin& in place are amon&st
others' some #e! aspects o" the role o" the entrepreneur$ Venture capitalists %ill insist on a
pro"essional team comin& in' incluin& a CEM to e,ecute the iea$ Mne)man armies are passe$
Inte&rit! an commitment are attributes sou&ht "or$
The venture capitalist can provie the strate&ic vision' but the team e,ecutes it$ As a "amous
/ilicon Valle! sa!in& &oes N/uccess is e,ecution' strate&! is a reamN$
?>
VENTURE CAPITAL IN INDIA
The Idea
The iea an its potential "or commerciali*ation are critical$ Venture "uns loo# "or a scalable
moel' at a countr! or a re&ional level$ Mther%ise the entire &ame %oul be reuce to a
manpo%er or machine multiplication e,ercise$ 6or e,ample' it is ver! eas! "or 1inustan Lever
to ouble sales o" Liril ) a soap %ithout incremental cape,' %hile <u8arat Ambu8a nees to spen
at least Rs?bn be"ore it can increase sales b! 1mn ton$ Distinctive competitive avanta&es must
e,ist in the "orm o" scale' technolo&!' brans' istribution' etc %hich %ill ma#e it i""icult "or
competition to enter$
"aluation
All investment ecisions are sensitive to this$ An ol stoc# mar#et sa!in& NEver! stoc# is a bu!
at a price an vice versaN$ Gost eals "ail because o" valuation e,pectation mismatch$ In Inia'
%hile calculatin& returns' venture capital "uns %ill ta#e into account issues li#e rupee
epreciation' political instabilit!' %hich as to the ris# premia' thus suppressin& valuations$
Lin#e to valuation is the sta#e' %hich the "un ta#es$ In Inia' entrepreneurs are still
uncom"ortable %ith the venture capital Nta#in& controlN in a see sta&e pro8ect$
EBit
0ithout e,it' &ains cannot be boo#e$ E,it ma! be in the "orm o" a strate&ic sale or7an IPM$
Ta,ation issues come up at the time$ An! "un %oul iscuss all e,it options be"ore closin& a
eal$ /ometimes' the "un insists on a bu! bac# clause to ensure an e,it$
DC
VENTURE CAPITAL IN INDIA
Portfolio 2alancin
Gost venture "uns tr! an achieve port"olio balancin& as the! invest in i""erent sta&es o" the
compan! li"e c!cle$ 6or e,ample' a venture capital has investe in a port"olio o" companies
preominantl! at see sta&e' the! %ill "ocus on e,pansion sta&e pro8ects "or "uture investments to
balance the investment port"olio$ This %oul enable them to have a phase e,it$
In summar!' venture capital "uns &o throu&h a certain ue ili&ence to "inali*e the eal$ This
inclues evaluation o" the mana&ement team' strate&!' e,ecution an commerciali*ation plans$
This is supplemente b! le&al an accountin& ue ili&ence' t!picall! carrie out b! an e,ternal
a&enc!$ In Inia' the entire process ta#es about E months$ Entrepreneurs are avise to #eep that
in min be"ore loo#in& to raise "uns$ The actual cash in"lo% mi&ht &et ela!e because o"
re&ulator! issues$ It is interestin& to note that in U/A' at times an&els %rite chec#s across the
table$
D1
VENTURE CAPITAL IN INDIA
CHAPTER 11
ACCE55IN(
"ENTURE CAPITA)
FUND
D2
VENTURE CAPITAL IN INDIA
The 2usiness Plan
The "irst step to%ars accessin& venture capital "unin& is the preparation o" the business plan$
The business plan shoul be able to provie in"ormation re&arin& the promoters' amount o"
"unin& neee an the time perio "or %hich it is neee an ho% this "unin& is &oin& to be
pai bac# to the VC$ To ans%er the above "unamental (ueries o" a venture capital "irm the
business plan is to be structure %ith the necessar! in"ormation$
2usiness Plan Coverae
EBecutive su$$ar%
A brie" escription o" the compan! an the t!pe o" business
A summar! o" the business nature
A escription o" the e,perience an e,pertise o" the mana&ement team
A summar! o" the prouct7service an competition
A summar! o" "inancial histor! an pro8ections
6uns re(uire an e(uit! o""ere to the investors
A escription o" use o" procees
The timin& o" returns on investment an e,it routes o""ere to the investor
2usiness bac/round
A brie" histor! an nature o" the business
The inustr! etails o" the business involve in
A summar! o" the "uture o" the business
D-
VENTURE CAPITAL IN INDIA
Product 3 5ervice
A escription o" the prouct or service
The uni(ueness o" the prouct
The present status o" the prouct' that is a concept' protot!pe or prouct rea! "or mar#et

1ar/et anal%sis
The si*e o" the potential mar#et an mar#et niche bein& pursue
A pro8ection o" the trens an "uture si*e o" the mar#et place
The estimate mar#et share
A escription o" the competition
The mar#etin& channel
A summar! o" the potential customers
The possibilit! o" relate or ne% mar#ets that can be evelope
5ales and $ar/etin strate%
The speci"ic mar#etin& techni(ues planne to be use
The pricin& plans an comparisons %ith pricin& aopte b! competitors
The planne sales "orce an sellin& strate&ies "or various accounts an mar#ets
The speci"ic approaches "or capitali*in& on each mar#etin& channel an comparison %ith
other practices %ithin the inustr!
Details o" avertisin& an promotional plans
D?
VENTURE CAPITAL IN INDIA
A escription o" customer service) %hich mar#ets %ill be covere b! irect sales "orce'
%hich b! istributors' representative or resellers

Production o*erations
A escription o" the prouction process
Details o" the prouction costs' incluin& labour "orce' e(uipment' technolo&! involve'
e,tent o" subcontract or outsourcin&' supplier
1anae$ent
An or&ani*ation chart sho%in& the corporate structure
A summar! o" the boar o" irectors an #e! emplo!ees an etails o" their s#ills an
e,perience $A list o" the remuneration "or all levels o" sta""
A propose plan o" ho% to retain #e! sta""
Ris/ factors
A escription o" the ma8or problems an ris#s relatin& to the inustr!' the compan! an the
proucts mar#et
Funds re>uested
A escription o" the t!pe o" "inancin&' such as e(uit! onl! or a combination o" e(uit! an
loan' an stoc# options to the investor
The capital structure an o%nership be"ore an a"ter the "inancin&
DD
VENTURE CAPITAL IN INDIA
Return on invest$ent and eBit
Details o" the timin& an e,pecte return o" the investment
A summar! o" the e,it strate&ies' such as initial public o""erin&' sale to a thir part! or
mana&ement bu!out
Use of *roceeds
/peci"! ho% the capital %ill be spent' i$e$B %hat amount o" capital %ill &o to %hich items$

Financial su$$aries
A summar! o" the compan!@s "inancial histor! an pro8ections o" three to "ive !ear perio
Details o" the principal accountin& policies o" the compan! an the ma8or assumptions
mae about the pro8ections
A**endices
Resumes o" #e! mana&ement an emplo!ees
Detaile "inancial "orecast an assumptions
Gar#et research report
Compan! literature an brochures an pictures o" the prouct
A &oo business plan sho%s investors the (ualit! an epth o" a compan!@s corporate leaership
an inicates mana&ement@s abilit! to reach state &oals$ These "actors lie at the heart o" the
ecision o" a venture capitalist to invest in the compan!@s "uture$
5election of "enture ca*ital fund
DE
VENTURE CAPITAL IN INDIA
A"ter the business plan is complete' the ne,t step is to select the venture capital "un' %hich is
suitable to !our proposal$ The entrepreneur shoul "irst ascertain as to the investment strate&! o"
the VC %ith re&ars to the sector in %hich the VC is intereste as %ell as the sta&e at %hich he
chooses to "un the pro8ect$ 3ase on this in"ormation the entrepreneur shoul shortlist the
suitable VCs %ho match his re(uirement an then approach them
6inancin& "rom venture capital "uns is available at various sta&es an i""erent VCs provie
"unin& in some or all o" the sta&es$
D;
VENTURE CAPITAL IN INDIA
CHAPTER 1'
EGIT ROUTE5
DA
VENTURE CAPITAL IN INDIA
A"ter the unit has settle o%n to a pro"itable %or#in& an the enterprise is in a
position to raise "uns throu&h conventional resources li#e capital mar#et' "inancial
institution or commercial ban#s' the venture capitalist li(uiate their investment an
ma#e an e,it "rom the investee compan!$
The ultimate ob8ective o" a Venture Capitalist is to reali*e "rom his investment b!
sellin& o"" the same at a substantial capital &ain$ In"ect at the time o" ma#in& their
investment' the venture capitalist plan their potential e,it$
The investee compan! has to prepare an ma#e suitable a8ustments in its capital
structure at the time o" reali*ation b! the venture capitalist$ The convertible pre"erence
shares an convertible loans must be converte to orinar! e(uit! be"ore the e,it b!
the venture capitalist$ In case o" non) convertible pre"erence shares an loans b! the
venture capitalist these are to be reeeme$ At e,it the special ri&hts &rante to the
venture capitalist cease to operate an venture capital "irms normall! %ithra% their
nominees "rom the boar o" the investee compan!$
The venture capitalist "irms have a motto OeBit at the $aBi$u$ *ossible *rofit or at
a $ini$u$ *ossible lossH + in case o" a "aile investment$ The e,it can be voluntar!
or involuntar!$ Li(uiation or receivership o" a "aile venture is a case o" involuntar!
e,it$ The voluntar! e,it can have "our altenative routes "or isinvestmentH
3u! bac# o" shares b! promoters or compan!$
/ale o" stoc# 4shares5
/ellin& to a ne% investor
/trate&ic7 Trae sale
D>
VENTURE CAPITAL IN INDIA
2U9 2ACF 3 5HARE5 REPURCHA5E
3u! bac# or shares repurchase has the "ollo%in& "ormsH
The investee compan! has to bu!bac# its o%n shares "or cash "rom its venture
capitalist usin& its internal accruals
The promoters an their &roup bu!s bac# the e(uit! sta#e o" venture capitalist$
The emplo!ees@ stoc# trusts are "orme %hich' in turn' bu! the share holin&
o" the venture capitalist in the compan!$
The route is suite to the Inian conitions because it #eeps the o%nership an control
o" the promoters intact$ Inian entrepreneurs are o"ten ver! touch! about o%nership
an control o" their business$ 1ence in Inia' "irst a bu! bac# option is normall! &iven
to the promoters or to the compan! an onl! on their re"usal the other isinvestments
routes are loo#e into$ The e,act price is mutuall! ne&otiate bet%een the
entrepreneur an the venture capitalist$ The price is etermine consierin& the boo#
value o" shares' "uture earnin& potential o" the venture' Price7Earnin& ratio o" similar
liste companies$
The companies %ere not allo%e to bu! bac# their shares in IniaB ho%ever' %ith
e""ect "rom the amenment in the companies act 41>>>5 the companies can o so no%$
5A)E OF 5HARE5 ON THE 5TOCF EGCHAN(E
EC
VENTURE CAPITAL IN INDIA
The venture capitalist can e,it b! &ettin& the compan! liste on the stoc# e,chan&e
an sellin& his e(uit! in the primar! or seconar! mar#et usin& an! o" the "ollo%in&
three methosH
5ale of shares on stoc/ eBchane after listin shares,
Venture capitalists &enerall! invest at the start up sta&e an propose to isinvest their
holin& a"ter the compan! brin&s out an IPM "or raisin& "uns "or e,pansion$ This
listin& on stoc# e,chan&e provies an e,it route "rom investment$
Initial Public Offer <IPO=3 Offer for sale
0hen the e,istin& entrepreneurs opt out o" bu! bac#' the venture capitalists opt "or
isinvestin& their stoc#s throu&h public o""erin&$
Disinvest$ents on OTC
An active capital mar#et supports the venture capital activities$ It enables the venture
capitalists to &et a suitable valuation "or their investment$ 3esies the re&ular stoc#
e,chan&e a %ell evelope MTC mar#et %here ealers can trae in shares$ The MTC
mar#et enables the ne% an smaller companies not eli&ible "or listin& on a re&ular
stoc# e,chan&e to be liste at an MTC e,chan&e an thus provie li(uiit! to the
investors$
As per the recommenations o" a number o" committees' an MTC e,chan&e %as
re(uire in Inia$ As a result OMver The Counter E,chan&e o" Inia 4MTCEI5@ %as set
up$
5E))IN( TO AN IN"E5TORI
Gan! a times "or their e,it venture capitalist an 7or the promoters locate a ne%
investor' a corporate bo! or another venture capital "irm$ The ne% investors are
E1
VENTURE CAPITAL IN INDIA
normall! those %ho "in some sort o" s!ner&! bet%een the investee compan! an
their e,istin& operations such that the relationship is use"ul to both the companies$
This route is also use %hen the promoters %ant to &et ri o" the venture capitalist$
/ome venture capitalists' as a polic! concentrate their activities to startups an earl!
sta&e investments$ /uch venture capital "uns e,it pavin& %a! "or the venture capital
"un speciali*in& in the later sta&e investment or bu! out eals$ M"ten a &ro%in&
venture nees secon sta&e "inancin&' i" the e,istin& venture capitalist as a polic! oes
not commit "uns "or the secon sta&e it normall! locates another venture capitalist
that "ins the investment attractive enou&h to enter$
CORPORATE 3 TRADE 5A)E
The venture capital "irm an the entrepreneur to&ether sell the enterprise to a thir
part! mostl! a corporate entit!$ 1erein the promoters also e,it "rom the venture alon&
%ith the venture capitalist$This is calle a corporate' strate&ic or trae sale$ The
reasons "or this sale can be varie' i""icult! in runnin& the business pro"itabilit! or a
perceive competition "rom more establishe bi& business houses havin& hu&e
resources an business s!ner&!$
Mn the other han' %here operations o" an e,istin& venture are moest' a hi&her e,it
valuation ma! be achieve in the mar#et rather than b! a trae sale' as the mar#et
investors are usuall! s%a!e b! the appeal o" the sector in %hich the venture operates
rather than the (ualit! o" its speci"ic business operations$
1odalities
E2
VENTURE CAPITAL IN INDIA
The moalities o" the trae sale i""er "rom case to case epenin& upon the nature o"
operations' its si*e' the re(uirements o" the bu!er' etc$ The sale can be in cash' a&ainst
the shares o" the ac(uirin& compan! or the combination o" the t%o$ The e(uit! o%ners
&et the shares o" the bu!er compan! in lieu o" the shares bein sol b! them$ /uch sales
have the avanta&e that the seller oes not have to pa! an! ta, as the transaction
involves onl! e,chan&e o" shares$
At times' it is throu&h a mana&ement bu!) out or bu!)in' %hich in turn ma! be
"inance partiall! b! another venture capital "un$ It is important to note that in Inia
i" the investee compan! is a liste compan! at the time o" trae sale' then the
provisions o" listin& a&reement are attracte besies the provisions o" the /E3I
re&ulations o" mer&er an ac(uisitions are also applicable$
1anae$ent 2u%AOuts
Venture capital bu!)outs are both a success"ul investment strate&! "or venture capital
investment as %ell as an e""icient e,it route$ 3u!)out "inance b! another venture
capitalist primaril! b! proviin& ebt is #no%n as leveraged buy-out. 3u!)out %ithout
participation b! another investor is calle mana&ement bu!)out$ 1ere in the current
mana&ement &roup purchases the sta#e o" the venture capitalist$ The stoc# options an
s%eat e(uit! have mae mana&ement bu!)out possible in Inia$
Gana&ement bu!)outs are important in venture capital mar#et "or various reasonsH
G3M@s provie an opportunit! to mana&ers to become entrepreneurs$
Venture capital investment in bu!)out has a lo%er investment ris# than earl!
sta&e investment$
G3M@s help smaller enterprises to aapt to technolo&ical chan&es$
E-
VENTURE CAPITAL IN INDIA
2u%Ain is similar to bu!)out but involves ne% mana&ement "rom outsie an
improvement in the operations o" the venture$ Incomin& ne% mana&ement is o"ten
un"amiliar %ith the operations o" the venture hence the ac(uirin& compan! ma! "eel
that the continuit! o" the e,istin& entrepreneur %ill be bene"icial "or the businessB the
services o" the ori&inal entrepreneur are retaine$ This helps in implementin& the
remainin& parts o" the ori&inal ieas an also provies continuit! to the venture$
PREAREJUI5ITE FOR THE EFFICIENT EGIT 1ECHANI51
Le&al "rame%or#
/mooth proceures "or sale 7 trans"er o" enterprises
E""icient stoc# mar#et
Gechanism "or listin& an train& o" e(uit! o" smaller companies$
E?
VENTURE CAPITAL IN INDIA
CHAPTER 10
RE(U)ATOR9
FRA1E-ORF FOR
"ENTURE CAPITA)
ED
VENTURE CAPITAL IN INDIA
IN INDIA
In his bu&et speech "or 1>AA)A>' the "inance minister eclare that a scheme %ill be "ormulate
uner %hich Ventures Capital Companies 7 6uns %ill be enable to invest in ne% companies
an be eli&ible "or the concessional treatment o" capital &ains available to non)corporate entities$
/uch companies %ill have to compl! %ith the "ollo%in& &uielines$
The minimum si*e o" a venture capital compan! %oul be Rs$1C crore$ I" it esires to raise "un
"rom the public the promoter@s share shall be less than 1C per cent$
Venture capital assistance shoul &o mainl! to enterprises %here the ris# element is
comparativel! hi&h ue to the technolo&! involve bein& relativel! ne%' untrie or ver! closel!
hel' an7or the entrepreneur bein& relativel! ne% an not a""luent thou&h other%ise (uali"ie
an the si*e bein& moest$ The assistances shoul be mainl! "or e(uit! support thou&h loan
support to supplement this ma! also be &iven$
Thus' venture capital assistance %ill be &iven to those entrepreneurs %hich satis"! the "ollo%in&
parameters H
Total investment not to e,cee Rs$1C crores$
Ne% or relativel! untrie or ver! closel! hel or bein& ta#en "rom pilot to commercial state or
%hich incorporate some si&ni"icant improvement over the e,istin& ones in Inia$
Relativel! ne%' pro"essionall! or technicall! (uali"ie %ith inae(uate resources or ban#in& to
EE
VENTURE CAPITAL IN INDIA
"inance the pro8ect$
A venture capital is re(uire to invest at least ;D per cent o" its "uns in venture capital activit!$
A venture capital is "irm can raise "uns throu&h pubic issues an7or private placement to "inance
VC67VCCs$ 6orei&n e(uit! upto 2D per cent multilateral 7 international "inancial or&ani*ations'
evelopment "inance institutes' repute mutual "uns' etc$' %oul be permitte provie these are
mana&ement neutral an are "or meium to lon&)term investments$
A venture capital "un %ill be mana&e b! pro"essional such as ban#ers' mana&ers an
aministration an persons %ith ae(uate e,perience o" inustr!' "inance' accounts etc$
The chan&e "inancial an "iscal environment urin& post liberali*ation perio hol out bri&ht
"uture o" venture capital in Inia$ 0ith "allin& ta, rates e(uit! becomes attractive' an promoters
%ant to put in ma,imum "uns$ In ne% companies toa!$ The ebt)e(uit! ratio is &enerall! 2H1$
The promoter has to compulsoril! contribute 2D percent o" the pro8ects cost' not 8ust the e(uit!$
1o%ever because inustr! is more competitive toa! promoters are %illin& to contribute as
much as ?C per cent o" the pro8ect cost$ 3an#s an other "inance institutions bein& ris# averse
%ill "un a ne% venture$
Uner the circumstances these entrepreneurs %ill be le"t %ith no option but to resort to venture
capital "irm' to "ill the &ap in their contribution to pro8ect cost$ This is ver! li#el! to continue as
pro"essional start their contribution to pro8ect cost$ This is ver! li#el! to continue as pro"essional
start their o%n units' ancillarisation ta#es place an lar&e companies be&an sourcin& their
re(uirement rather than ma#in& ever! thin& themselves$
E;
VENTURE CAPITAL IN INDIA
CHAPTER 14
5-OT ANA)95I5
OF INDIAN
"ENTURE CAPITA)
INDU5TR9
EA
VENTURE CAPITAL IN INDIA
5TREN(HT5 -EAFNE55
An effort initiated fro$ !ithin K Ho$e ro!n
Increased a!areness of venture ca*ital
1ore ca*ital under $anae$ent b% "CFs
Industr% crossed learnin curve,
1ore eB*erienced "enture Ca*italists#
Inter$ediaries# and Entre*reneurs,
(ro!in nu$ber of forein trained *rofessionals,
(lobal co$*etition ro!in,
1ovin to!ards international standards
Offshore funds brin stron forein ties
1atured to!ards $ar/et s%ste$
Electronic tradin K throuh N5E . 25E,
"aluation addition
Irreversible refor$
Reulator% fra$e!or/ evolvin
Faddish
)i$ited eBit o*tion
Uncertainties
Polic% re*atriation# taBation
2ureaucratic $eddlin and riid
official
attitude
Industr% fra$ented and *olari7edA
1iBed ",C culture
5$aller funds !ith illi>uid
invest$ents
Do$estic fund raisin difficult
)ac/ of trans*arenc% . cor*orate
overnance
Accountin standards
Poor leal ad$inistration
Difficult due dilience
Inade>uate $anae$ent de*th
"aluation eB*ectations unrealistic
Technical and 1ar/et evaluation
E>
VENTURE CAPITAL IN INDIA
difficult
Neliible $inorit% *rotection
rihts
Inade>uate cor*orate la!s
OPPORTUNITIE5 THREAT5
(ro!th ca*ital for stron co$*anies
and 2u%outs of !ea/ co$*anies due to ro!in lobal
co$*etition
Financial restructurin have over leveraed
co$*anies ta/in *lace,
Ac>uisition of >uoted s$all3 $ediu$ ca*
co$*anies,
Pre $one% valuations lo!
"ast *otential eBists in turn around# 12O#
12I,
Chane in overn$ent *olicies !ith res*ect
to K
1, 5tructurin
', TaBation
Threats fro$ !ithin EB*losive eB*ansion
and over EBuberance of investors
(reed fro ver% hih returns,
;C
VENTURE CAPITAL IN INDIA
CHAPTER 16
I55UED FACED 29
"ENTURE CAPITA)
IN INDIA
;1
VENTURE CAPITAL IN INDIA
The Inian venture capital inustr!' at the present' is at crossroas$ 6ollo%in& are the ma8or
issues "ace b! this inustr!$
1$ )i$itation on structurin of "enture Ca*ital Funds <"CFs=& VC6s in Inia are
structure in the "orm o" a compan! or trust "un an are re(uire to "ollo% a three)tier
mechanism)investors' trustee compan! an AGC$ A proper ta,)e""icient vehicle in the "orm o"
OLimite Liabilit! Partnership Act@' %hich is popular in U/A' is not mae applicable "or
structurin& o" VC6s in Inia$ In this "orm o" structurin&' investors@ liabilit! to%ars the "un is
limite to the e,tent o" his contribution in the "un an also "ormalities in structurin& o" "un are
simpler$
2$ Proble$ in raisin of funds& In U/A primar! sources o" "uns are insurance
companies' pensions "uns' corporate boies etcB %hile in Inian omestic "inancial institutions'
multilateral a&encies an state &overnment unerta#in&s are the main sources o" "uns "or VC6s$
Allo%in& Pension "uns' Insurance companies to invest in the VC6s %oul enlar&e the
possibilit! o" settin& up o" omestic VC6s$ 6urther' i" Gutual 6uns are allo%e to invest upto D
percent o" their corpus in VC6s b! /E3I' it ma! lea to increase availabilit! o" "un "or VC6s$
-$ )ac/ of Inventive to Investors& Presentl!' hi&h net %orth iniviuals an corporate are
not provie %ith an! investments in VC6s$ The problem o" raisin& "uns "rom these sources
"urther &ets a&&ravate %ith the i""erential ta, treatment applicable to VC6s an mutual "uns$
0hile the income o" the Gutual "uns is totall! ta, e,empte uner /ection 1C42-D5 o" the
;2
VENTURE CAPITAL IN INDIA
Income Ta, Act income o" omestic VC6s' %hich provie assistance to small' an meium
enterprise is not totall! e,empte "rom ta,$ In absence o" an! inventive' it is e,tremel! i""icult
"or omestic VC6s to raise mone! "rom this investor &roup that has a &oo potential$
?$ Absence of Lanel investorsH& In /ilicon Valle!' %hich is a nurturin& &roun "or venture
"uns "inance IT companiesB initial7 see sta&e "inancin& is provie b! the an&el investors till
the compan! becomes eli&ible "or venture "unin& $ There a"ter Venture Capitalist throu&h
"inancial support an value)ae inputs enables the compan! to achieve better &ro%th rate an
"acilitate its listn& on stoc# e,chan&es$ Private e(uit! investors t!picall! invest at e,pansion7
later sta&es o" &ro%th o" the compan! %ith lar&e investments$ In contrast to this phenomenon'
Inian inustr! is mar#e b! an absence o" an&el investors$
D$ )i$itations of invest$ent instru$ents& As per the section 1C42-6A5 o" the Income Ta,
Act' income "rom investments onl! in e(uit! instruments o" venture capital unerta#in&s is
eli&ible "or ta, e,emptionB %hereas /E3I re&ulations allo% investments in the "orm o" e(uit!
shares or e(uit! relate securities issue b! compan! %hose shares are not liste on stoc#
e,chan&e$ As VC6s normall! structure the investments in venture capital unerta#in&s b! %a! o"
e(uit! an convertible instruments such as Mptionall!7 6ull! Convertible Debentures'
Reeemable Pre"erence shares etc$' the! nee ta, brea#s on the income "rom e(uit! lin#e
instruments$
E$ Do$estic "CFs visAMAvis Offshore Funds& The omestic VC6s operations in the
countr! are &overne b! the re&ulations as prescribe b! /E3I an investment restrictions as
place b! C3DT "or availin& o" the ta, bene"its$ The! pa! ma,imum mar&inal ta, -D percent in
respect o" non)e,empt income such as interest throu&h Debentures etc$' %hile o"") shore "uns
%hich are structure in ta, havens such as Gauritius are able to overcome the investment
restriction o" /E3I an also &et e,emption "rom Income Ta, uner Ta, Avoiance Treaties$ This
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VENTURE CAPITAL IN INDIA
enies a level pla!in& "iel "or the omestic investors "or carr!in& out the similar activit! in the
countr!$
;$ )i$itation on industr% se$ents& In sharp contrast to other countries %here telecom'
services an so"t%are ba& the lar&est share o" venture capital investments' in Inia other
conventional sectors ominate venture "inance$ Mpenin& up o" restrictions' in recent time' on
investin& in the services sectors such as telecommunication an relate services' pro8ect
consultanc!' esi&n an testin& services' tourism etc' %oul increase the omain an &ro%th
possibilities o" venture capital$
A$ Ano$al% bet!een 5E2I reulations and C2DT rules& C3DT ta, rules reco&ni*e
investment in "inanciall! %ea# companies onl! in case o" unliste companies as venture
investment %hereas /E3I re&ulations reco&ni*e investment in "inanciall! %ea# companies'
%hich o""ers an attractive opportunit! to VC6s$ The same ma! be allo%e b! C3DT "or availin&
o" ta, e,emption on capital &ains at a later sta&e$ Also /E3I re&ulations o not restrict si*e o" an
investment in a compan!$ 1o%ever' as per Income ta, rules' ma,imum investment in a compan!
is restricte to less than 2C per cent o" the raise corpus o" VC6 an pai up share capital in case
o" Venture Capital Compan!$ 6urther' investment in compan! is also restricte upto ?C per cent
o" e(uit! o" Investee Compan!$ VC6s ma! place the investment restriction "or VC6s b! %a! o"
ma,imum e(uit! sta#e in the compan!' %hich coul be upto ?> per cent o" e(uit! o" the Investee
Compan!$
>$ )i$itations on EBit 1echanis$& The VC6s ' %hich have investe in various ventures'
have not been able to e,it "rom their investments ue to limite e,it routes an also ue to
unsatis"actor! per"ormance o" MTCEI $ The threshol limit place b! various stoc# e,chan&es
acts as eterrent "or listin& o" companies %ith smaller e(uit! base$ /E3I can consier lo%erin&
o" threshol limit "or public7listin& "or companies bac#e b! VC6s$ 3u!)bac# o" e(uit! shares b!
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VENTURE CAPITAL IN INDIA
the compan! has been permitte "or unliste companies' %hich %oul provie e,it route to
investment o" venture capitalists$
1C$ )eal Fra$e!or/& Lac# o" re(uisite le&al "rame%or# resultin& in ae(uate penalties in
case o" suppression o" "acts b! the promoters)results in lo% returns even "rom per"ormin&
companies$ This has bearin& on e(uit! investments particularl! in unliste companies$
CHAPTER 18
FUTURE OF
"ENTURE CAPITA)
IN INDIA
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VENTURE CAPITAL IN INDIA
Rapil! chan&in& economic environment accelerate b! the hi&h technolo&! e,plosion'
emer&in& nees o" ne% &eneration o" entrepreneurs in the process an inae(uac! o" the e,istin&
venture capital "uns7schemes are inicative o" the tremenous scope "or venture capital in Inia
an pointers to the nee "or the creation o" a soun an broa)base venture capital movement
Inia$
There are man! entrepreneurs in Inia %ith a &oo pro8ect iea but no previous entrepreneurial
trac# recor to levera&e their "irms' hanle customers an ban#ers$ Venture capital can open a
ne% %ino% "or such entrepreneurs an help them to launch their pro8ects success"ull!$
0ith rapi international march o" technolo&!' eman "or ne%er technolo&! an proucts in
Inia has &one up tremenousl!$ the pace o" evelopment o" ne% an ini&enous technolo&! in
the countr! has been slac# in vie% o" the "act that several process evelope in laboratories are
not commerciali*e because o" un%illin&ness o" people to ta#e entrepreneurial ris#s' i$e$ ris#
their "uns as also uner&o the oreal o" mar#etin& the proucts an process$ In such a situation'
venture "inancin& assumes more si&ni"icance$ It can act not onl! act as a "inancial catal!st but
also provie stron& impetus "or entrepreneurs to evelop proucts involvin& ne%er technolo&ies
an commerciali*e them$ This %ill &ive a "illip to the evelopment o" ne% technolo&! an %oul
&o a lon& %a! in broaenin& the inustrial base' creation o" 8obs' provie a thrust to e,ports an
help in the overall enrichment o" the econom!$
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VENTURE CAPITAL IN INDIA
In aition' venture capital %ill be neee ur&entl! to solve the serious problems o" sic#ness
%hich has pla&ue man! Inian Inustries$ There are lar&e number o" sic# companies %hich
o""er opportunities "or turn)aroun' either throu&h a chan&e in the prouct line or use o" e,istin&
"acilities in a i""erent %a! or in an! other manner$ 0hat is neee is the suppl! o" e(uit! to
persons %ho have "ertile ieas' necessar! e,pertise an competence an %ho can brin& about
improvements in some units$
Another t!pe o" situation commonl! "oun in our countr! is %here the local &roup an a multi)
national compan! ma! be rea! to enter into a 8oint venture but the "ormer oes not have
su""icient "uns to put up its share o" the e(uit! an the latter is restricte to a certain percenta&e$
6or the personal reasons or because o" competition' the local &roup ma! not be #een to invite an!
one in its inustr! or an! ma8or private investor to contribute e(uit! an ma! pre"er a venture
capital compan!' as a less intimatel! involve an temporar! shareholer$ Venture capitalists can
also len their e,pertise an stanin& to the entrepreneurs$
A lar&e number o" smaller units servin& as ancillaries to ma8or inustrial &roups nee capital'
e,pertise an contacts o" venture capitalist "or up&raation o" their technolo&! in tune %ith the
emans "rom the ma8or inustrial units$ It is &enerall! "oun that small suppliers are "ace %ith
a choice o" &oin& out o" business' losin& their ma8or client' bein& ac(uire b! the client or
obtainin& at an e,orbitant rate "rom a source outsie the inustr!$ Venture capitalist can help
these units an save them "rom the crisis$
In service sector' %hich has Immense &ro%th prospects in Inia' venture capitalists can pla!
si&ni"icant role in tappin& its potentialit! to the "ull$ 6or instance' venture capitalists can provie
capital an e,pertise to or&ani*ations sellin& anti(ue' remoele 8e%eller!' builers o" resort
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VENTURE CAPITAL IN INDIA
hotels' bab! an health care mar#et' retirement homes an small houses$
In vie% o" the above' it %ill be esirable to establish a separate national venture capital "un to%
%hich the "inancial institutions an ban#s can contribute$ In scope an content such a national
venture capital "un shoul coverH
4i5 all the aspects o" venture capital "inancin& in all the three sta&es o" conceptual' evelopmental
an e,ploitation phases in the process o" commerciali*ation o" the technolo&ical innovation an
4ii5 as ma! o" the ris# sta&es)evelopment' manu"acturin&' mar#etin&' mana&ement an &ro%th
as possible uner Inian Conitions$ The "un shoul o""er a comprehensive pac#a&e o"
technical' commercial' mana&erial an "inancial assistance an services to builin& entrepreneurs
an be a position to o""er innovative solutions to the varie problems "ace b! them in business
promotion' trans"er an innovation$ To this en' the propose national venture capital "un
shoul have at its comman multi)isciplinar! technical e,pertise$ The ma8or thrust o" this "un
shoul be on the promotion o" viable ne% business in Inia to ta#e avanta&e o" the on comin&
hi&h technolo&! revolution an settin& up o" hi&h &ro%th inustries so as to ta#e the Inian
econom! to commanin& hei&hts$
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VENTURE CAPITAL IN INDIA
CHAPTER 1?
CONC)U5ION
;>
VENTURE CAPITAL IN INDIA
It is essential that Venture Capital 6unin& a&encies pla! a ma8or role in proviin&
capital to inustrial enterprises especiall! the /GE@s i" the Inian econom! has to
&ro% rapil!$ There is a stron& case "or Venture Capital 6unin& "or /GE@s$ Ku&in&
"rom the success in the IT' 3iotechnolo&!' Retail an Pharma sectors the VC6
a&encies can e,plore possibilities o" "unin& /GE@s in manu"acturin& an other
sectors also$
The &overnment has brou&ht in suitable re&ulations throu&h the R3I' /E3I an other
institutions to "acilitate Venture Capital 6unin&$ VC6 a&encies shoul a&&ressivel!
promote "unin& an nurture promisin& /GE@s
The P/3@s an 6I@s in Inia %ho %ere reluctant to "ora! into venture capital "unin&
have no% realise its potential an are %illin& to partner Inian VC6 a&encies b!
proviin& "uns$
VC6 a&encies shoul not onl! en&a&e in "unin& but also provie mana&erial
&uiance an support to /GE@ s to compete in the present &lobal environment an
enable them to achieve turnovers an pro"its' %hich %ill ultimatel! result in the
enterprise &oin& public in the shortest perio$
Venture Capital supporte enterprises can convert into (ualit! initial public o""erin&s
4IPMs5' resultin& in capital "rom pension "uns an investors "lo%in& into VC "uns$ It
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VENTURE CAPITAL IN INDIA
%ill also provie protection to investors' especiall! small investors$ 6urther it %ill
result in substantial an sustainable emplo!ment &eneration b! creatin& relate
ancillar! units an support services$
6inall!' research laboratories uner C/IR' e"ense laboratories' universities an
technical institutes are carr!in& out a lot o" scienti"ic an technical research$ A
suitable venture capital environment can help in ienti"!in& an convertin& some o"
this research into commercial prouction in the /mall an Geium /cale sectors$
Thus' it is apparent that venture capital "unin& shoul be encoura&e to "acilitate
evelopment in small an meium enterprise %hich in turn leas to overall &ro%th in
the Inian econom!$
A1
VENTURE CAPITAL IN INDIA
CHAPTER 1@
2I2)O(RAPH9
A2
VENTURE CAPITAL IN INDIA
Reference 2oo/s . 1aa7ines
"enture Ca*ital# The Indian EB*erience b% I 1 T Tande%
Issues Facin Indian "enture Ca*ital Industr% b% H RaNur/ar
2usiness -orld
India Toda%
Ne!s*a*ers
The Ti$es of India
Econo$ics Ti$es
Indian EB*ress
Financial EB*ress
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VENTURE CAPITAL IN INDIA
-ebsites
!!!,indiainfoline,co$
!!!,icfai*ress,or
!!!,!ebcra!ler,co$
!!!,na$asthenri,co$