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Macro Analysis of Venture Capital Funding

A Macro Analysis of the Venture Capital Funding: An Indian Perspective

Ruchi Mehrotra Faculty Finance, School of Business, Alliance University, Bangalore uniqueruchi@rediffmail.com

CA Pankaj Mehrotra Manager Accounts Aditya Birla Group, Bangalore pankajdreams@gmail.com

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Macro Analysis of Venture Capital Funding

A Macro Analysis of the Venture Capital Funding: An Indian Perspective


Abstract

For the Indian prospective, a book by I M Pandey (1998) studying the development of the Indian venture capital market, which identifies various steps in the developmental process. Satyanarayana Chary & T. Prasad (2006) conducted a research to study the importance of financial performance analysis of venture capital undertakings through ratio analysis. Financial performance of an organization depends on its operational activities that generates the revenue and incurs some cost (Satyanarayana Chary & T. Prasad, 2006). Need for the study Taking the study of S. Chary & T. Prasad forward where research was done to study the performance of venture capital undertakings through a case study of Semiconductor Company, in this Research paper an attempt has been made to study the financial performance analysis of two India based Information technology companies, (Listed on Indian Stock Exchanges) funded by Venture capital investors, for the duration of period for which the funds of the venture capital investors were locked in the company. An attempt has been made to study the performance and impact on financials of VC accepting firms at the point of entry and at exit point of time. Two live case studies Sasken & R Systems have been studied to see the impact of VC Funding.

1.1. Statement of Problem


The study focuses on a broad industry wise analysis of the Venture Capital as a source of funding for the budding companies in India. It also aims to analyze financial performance of specific companies funded by VC through financial statement analysis.

1.2. Objective of the Study


1. To study the industry and sector wise distribution of the venture capital funding in Indian markets. 2. To analyze financial performance of specific companies funded by VC through key ratios. Specifically looking at the pre & post impact of VC funding on the financial health of the companies under study. 3. To examine the risk factors associated and legal framework formulated by the SEBI to encourage venture capital in India. 4. To study various strategies and instruments of entry and exit used by the venture capitalists in India for two case studys Sasken and R Systems Ltd who received VC funding
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Macro Analysis of Venture Capital Funding

5. Financial Analysis Performance analysis of the mentioned cases to understand the advantage of VC funding

1.3. Scope of the Study


The scope of the study includes all types of venture capital firms whether setup as a companies, trusts or foundations, corporate sponsored organizations or HNIs to nurture the budding entrepreneurs. Venture capital companies or firms irrespective of whether they are registered with SEBI are studied to gain an insight in the venture capital in India. Two specific companies as Case studies is chosen to understand the pre-post impact of VC funding Sasken & R Systems Ltd. The financial performance analysis covers all key ratios.

1.4. Research Methodology


1.4.1. Sources of Data For the purpose of the study, secondary data is utilized and it is collected from Internet, books, newspapers and magazines, company websites, etc. For financial data of the companies, annual reports are used to collect data from publicly available sources. And analysis is done using the financial tools. 1.4.2. Research Design The research type used in the study is Descriptive & Analytical in nature. But financial numbers are studied through the Ratio Analysis.
Keywords: Exit Strategy, Financial Performance Analysis, Venture Capitalist, Ratio Analysis.

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Macro Analysis of Venture Capital Funding

A Macro Analysis of the Venture Capital Funding: An Indian Perspective VENTURE CAPITAL An Overview
The term venture capital comprises of two words that is, Venture and Capital. Venture is a course of processing, the outcome of which is uncertain but to which is attended the risk or danger of loss. Capital means recourses to start an enterprise. To connote the risk and adventure of such a fund, the generic name Venture Capital was coined. Venture capital has also been described as unsecured risk financing. The relatively high risk of venture capital is compensated by the possibility of high returns usually through substantial capital gains in the medium term. Venture capital in broader sense is not solely an injection of funds into a new firm, it is also an input of skills needed to set up the firm, design its marketing strategy, organize and manage it. Thus it is a long term association with successive stages of companys development under highly risky investment conditions. 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.

WHAT IS VENTURE CAPITAL


According to Indian Venture Capital Association (IVCA), Venture capital is a means of equity financing for rapidly-growing private companies. Finance may be required for the start-up, development/expansion or purchase of a company. Venture Capital firms invest funds on a professional basis, often focusing on a limited sector of specialization (e.g. IT, infrastructure, health/life sciences, clean technology, etc.). It typically entails high risk for the investor, but it has the potential for above-average returns. (from investopedia.com)

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The goal of venture capital is to build companies so that the shares become liquid (through IPO or acquisition) and provide a rate of return to the investors (in the form of cash or shares) that is consistent with the level of risk taken. With venture capital financing, the venture capitalist acquires an agreed proportion of the equity of the company in return for the funding. Equity finance offers the significant advantage of having no interest charges. It is "patient" capital that seeks a return through long-term capital gain rather than immediate and regular interest payments, as in the case of debt financing. Given the nature of equity financing, venture capital investors are therefore exposed to the risk of the company failing. As a result the venture capitalist must look to invest in companies which have the ability to grow very successfully and provide higher than average returns to compensate for the risk.

VENTURE CAPITAL FIRMS AND FUNDS


A venture capitalist (also known as a VC) is a person or investment firm that makes venture investments, and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments. A venture capital fund refers to a pooled investment vehicle (often an LP or LLC) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans. Venture capital firms typically comprise small teams with technology backgrounds (scientists, researchers) or those with business training or deep industry experience.

Venture capital firms are typically structured as partnerships, the general partners of which serve as the managers of the firm and will serve as investment advisors to the venture capital funds raised. Most venture capital funds have a fixed life of 10 years, with the possibility of a few years of extensions to allow for private companies still seeking liquidity. The investing cycle for most funds is generally three to five years, after which the focus is managing and making follow-on investments in an existing portfolio. This model was pioneered by successful funds in Silicon Valley through the 1980s to invest in technological trends broadly but only during their period of

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ascendance, and to cut exposure to management and marketing risks of any individual firm or its product.

CHARACTERISTICS OF VENTURE CAPITAL

HIGH RISK By definition the Venture capital financing is highly risky and chances of failure are high as it provides long term startup capital to high risk-high reward ventures. Venture capital assumes four types of risks, these are: 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. Legal risk Law of land(Tax, FDI/FIIs rules) for VCs change Political risk Regime of the government may change & so may laws Operation risk - Operations may not be cost effective resulting in increased cost decreased gross margins.

HIGHLY TECHNOLOGICAL BASED EQUITY PARTICIPATION PARTICIPATION IN MANAGEMENT LONG TIME HORIZON ILLIQUID INVESTMENT ACHIEVE SOCIAL OBJECTIVES

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VENTURE CAPITAL / PRIVATE EQUITY INVESTMENT IN INDIA

Indian PE/ VC penetration as percentage of GDP in 2005 was 0.3%. At its peak in 2007, PE/ VC penetration was 1.2% when GDP grew 8%. In the same year, it was 3.5% of the GDP growth in the US. The PE/VC investments in India for 2009 was just 0.3% of the total GDP growth, while, in the US, it was 0.7% of the total GDP growth.

The VC investment in India as percentage of total PE investments is growing in a steady pace. The VC investments in India were 7% of the total PE investments which grew to 7.5% in 2008 and to 12.3% in 2009. In the US, it grew to 18.6% in 2009 from 9.3% in 2007. During 2004 2009

A capital of $40 billion was invested by PE/VC funds in 1800 companies during the 2004-2009 in India.

During the same period, $3.3 billion of venture capital were invested in 625 deals, where 73% (by value) and 67% (by volume), in technology companies. As far as the PE investments during 2004-2009 are concerned, India witnessed 268 deals worth $4 billion in 2009 against $6 billion raised by India focused funds. In 2007, against $9.6 billion raised by India focused funds, 473 deals worth $13.57 took place in India.

By a stage-wise breakup, PE investments that took place during 2004-2009 were: Late stage PE deals $14.6 billion, (which is 33% of total investment) PIPE deals worth $12.32 billion (28%), Growth stage deals worth $7.5 billion (17%) Buyout deals worth $4.11 (9%) Early stage deals worth $3.94 billion (9%)

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PE/ VC Investments 2007 - 2010 Year 2007 2008 2009 2010 Number of investments 500 478 289 324 Amount($M) 14,076 10,564 4,068 7,958

Table 1: PE/ VC Investments 2007 - 2010 (Source: Venture intelligence database)

During 2010 Size(US$M) 0-5 5-10 10-15 15+ No. of Deals 16 13 8 1 Value($M) 30 78 87 15

Table 2: Distribution of VC investment by deal size in 2010 (Source: Venture intelligence database)

Figure 1: Distribution of VC investment by deal size in 2010

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Size(US$M) 0-5 5-10 10-15 15-25 25-50 50-100 100-200 200+

No. of Deals 27 23 21 17 17 8 5 5

Value($M) 55 144 228 328 580 497 657 1359

Table 3: Distribution of PE investment by deal size in 2010 (Source: Venture intelligence database)

Figure 2: Distribution of PE investment by deal size in 2010

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VENTURE CAPITAL FINANCING SPECTRUM

The requirements of funds vary with the life cycle stage of the enterprise. Even before a business plan is prepared the entrepreneur invests his time and resources in surveying the market, finding and understanding the target customers and their needs. The table below shows risk perception and time orientation for different stages of venture capital financing: Financing Stage Period (funds Risk perception For supporting a concept or 7-10 Extreme idea or R & D for product development 5-9 Very high Initializing operations or developing prototypes Start commercial production and marketing Activity to be financed

locked in yrs) Early stage finance Seed

Start up

First stage

3-7

High

Second stage

3-5

Sufficiently Expand market & growing high working capital need Market expansion, acquisition

Later stage finance

1-3

Medium

& product development for profit making company

Buy out-in

1-3

Medium Medium to high Low

Acquisition financing Turning around a sick company

Turnaround

3-5

Mezzanine

1-3

Facilitating public issue

Table 4: Risk perception and time orientation for different stages of venture capital financing

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2010 GLOBAL VENTURE CAPITAL SURVEY

The 2010 Global Venture Capital survey, conducted by Deloitte and the National Venture Capital Association, measured the opinions of more than 500 venture capitalists worldwide, and also examined the factors which are contributing to each countrys outlook. The survey of investors found bullish expectations for VC activity over the next five years in emerging economies in China, Brazil and India, but a much grimmer outlook for the US and parts of Europe. Respondents felt that improving entrepreneurial environment and growing market in India, create a favorable climate for venture capital in India.

Responses and Demographics

In the survey, 516 responses were taken from nine countries which included Brazil, Canada, China, France, Germany, India, Israel, UK and the United States. 47% responses were from U.S. and 53% foreign countries. Responses were taken mainly from large, mid-sized and small firms, with the largest concentration, 36%, with $100 - $499 million in assets under management.

INDIAN VENTURE CAPITAL INDUSTRY

The pioneers of the Indian venture capital industry were largely government-owned banks and financial institutions, with some contribution from the financial services companies in the private sector. The following VC funds were the pioneers which laid the foundations of Indias VC industry:

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VC Funds

Set Up By

Year

Size (Million)

Venture Capital Fund Scheme India Investment Unit Scheme

IDBI Grindlays 3i Invest. Services Ltd

1987 1987

Rs. 543.6 US$ 7.5

Venture Capital Unit Scheme I CanBank Venture Capital fund

TDICI CanBank Financial Services Ltd

1989 1989

Rs. 300 Rs. 156

Venture Capital Unit Scheme II APIDC Venture Capital Fund Gujarat Venture Capital Fund IL&FS Venture Fund

TDICI APIDC Venture Capital Ltd Gujarat Venture Finance Ltd IL&FS Venture Corporation Ltd

1990 1990 1990 1991

Rs. 1000 Rs. 135 Rs. 240 Rs. 500

Indus Venture Capital Fund


th

Indus Venture Management Ltd

1991

Rs. 210

20 Century Fund

20th Century Venture Capital Corp. Ltd.

1991

Rs. 287

Venture Capital Unit Scheme III IFB Venture Capital Information Technology Fund

RC&TF Corporation IFB Venture Finance Credit Capital Venture Fund Ltd

1991 1992 1993

Rs. 300 Rs. 100 Rs. 100

Table 5: Venture Capital Funds Set Up during 1987-1994

Entry of Foreign Venture Capital Funds: 1995-1998 Thereafter, the Government of India issued guidelines in September 1995 for overseas investment in venture capital in India. For tax-exemption purposes, guidelines were also issued by the Central Board of Direct Taxes (CBDT) and the investments and flow of foreign currency into and out of India was governed by the Reserve Bank of Indias (RBI) requirements. Further, as a part of its mandate to regulate and to develop the Indian capital markets, the Securities and Exchange Board of India (SEBI) framed the SEBI (Venture Capital Funds) Regulations, 1996. These guidelines were further amended in April 2000 with the objective of fuelling the growth of venture capital activities in India.

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Income-Tax Act, 1961 (the IT Act)

The income of venture capital companies or funds set up to raise funds for investment in venture capital undertakings is tax exempt, if they are registered with SEBI and in compliance with Indian government and SEBI Regulations. The income of such companies and/or funds will continue to be exempt, if the undertaking, in which its funds are invested, subsequent to the investment, gets listed on a stock exchange. However, tax will be payable by the shareholders of or withdrawers from the company or fund.

Venture capital companies or funds are exempt from withholding tax in respect of income distributed to their investors. The provisions of the IT Act regarding taxation on distributed profits (dividend), distributed income and deduction of tax at source do not apply to venture capital companies or funds.

DATA ANALYSIS SECTOR WISE ANALYSIS OF INVESTMENT IN INDIA

As per SEBI, the venture capital market is categorized into 9 following sectors which are Information Technology, Telecommunications, Pharmaceuticals, Biotechnology, Media/Entertainment, Services Sector, Industrial products, Real Estate and others. This analysis presents the sector wise distribution of Venture Capital funds and Foreign Venture Capital funds in different sectors of venture capital market over the period of 2007 to 2010. The table showing the detailed figures is available in annexure.

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Figure 3: Sector Wise distribution of VCF and FVCI during the year 2007(in crores)

Interpretation
During the year 2007, it can be observed that that maximum Venture Capital Funds (VCF) were obtained by Real Estate sector which accounted to 9805 crores whereas lowest Venture capital funding was in Telecommunications sector of 415 crores. The maximum Foreign Venture capital Funds were obtained by again Real Estate sector followed by Information technology and lowest was in Biotechnology sector.

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Figure 4: Sector Wise distribution of VCF and FVCI during the year 2008 (in crores)

Interpretation
During the year 2008, it can be observed that there was an increasing trend in Foreign Venture Capital Funds investing in Information technology. The total amount of funds in this sector by FVCI increased from 4709 crores in 2007 to 6174 crores in 2008, which is an increase of 31.11%. Increase of 98% in pharmaceutical sector and 146% in Media/ Entertainment was found in Foreign Venture Capital investments in 2008.

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Figure 5: Sector Wise distribution of VCF and FVCI during the year 2009 (in crores)

Interpretation
In 2009, real estate sector maintained its top position of Venture Capital Fund recipient, although there was a decrease in Foreign Venture Capital in 2009, which dropped 11.2% from 6503 crores in 2008 to 5727 crores in 2009. A tremendous increase was observed in Information Technology and

Telecommunication sector in terms of Foreign Venture Capital funds. An overall decrease in Venture Capital investment was observed in Biotechnology sector.

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Figure 6: Sector Wise distribution of VCF and FVCI during the year 2010 (in crores)

Interpretation
In 2009, real estate sector maintained its top position of Venture Capital Fund recipient, although there was a decrease in Foreign Venture Capital in 2009, which dropped 11.2% from 6503 crores in 2008 to 5727 crores in 2009. A tremendous increase was observed in Information Technology and Telecommunication sector in terms of Foreign Venture Capital funds. An overall decrease in Venture Capital investment was observed in Biotechnology sector.

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ANALYSIS OF PERFORMANCE OF SASKEN

In 1999, Intel Capital was an investor in a critical round of funding for Sasken. This attention and investment from the leading brand in semiconductors validated that silicon automation systems was a legitimate market segment and gave Sasken the credibility and funding it needed to expand globally. Intel Capital also participated in a second round of funding in 2003 to help the company continue its dramatic growth. In September 2005, Sasken underwent a very successful Initial Public Offering (IPO).

Till 2006, Venture Capital Investors (VCI) and Foreign Venture Capital Investors (FVCI) held 814,172 numbers of shares which accounted for 2.89% of total number of shares of the company.

In 2006, Venture Capital Investors (VCI) exited from the company and from 2007 to 2009 only Foreign Venture Capital Investors (FVCI ) were active which held 490,500 shares accounting for 1.78% of total number of shares of the company. In the end of 2009 Foreign Venture Capital Investors (FVCI) also exited from the company.

Following is the analysis of the performance of the company for the duration for which the venture capitalists were active in the company.

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SALES

Figure 7: Sales performance of Sasken Ltd from 1999-00 to 2008-09

Interpretation

After the first round of funding in 1999, the sales increased 88.14% from 759.16 million to 1428.33 million. But in the subsequent year the sales decreased 23.9% to 1086.27 million and then to 1092.55 million in 2002-03, this led to second round of funding from Intel Capital, after which it went for an upward trend.

Overall for the period of 10 years for which the VC funding was there in the company, the sales increased from 759.16 million to 6978.19 million with a compounded annual growth rate of 24.83%. Long term growth is sustainable when the VC investor stays for a longer duration, like in this case its almost a decade.

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1.1.2. PBIT

Figure 8: PBIT (in Rs. Lakhs) from 1999-00 to 2008-09

Interpretation
Overall for the duration from 1999-00 to 2008-09, the Profit before Interest and Tax (PBIT), increased from 2162.3 lakhs to 12523.66 lakhs, although a decrease in the PBIT was observed during 2001-02 where the company witnessed a loss of 878.15 lakhs.

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PAT

Figure 9: PAT (in Rs. Lakhs) from 1999-00 to 2008-09

Interpretation
Overall for the duration from 1999-00 to 2008-09, the Profit after Tax (PAT), increased from 1486.12 lakhs to 4230.41 lakhs, although a fluctuation in the PAT was observed for the whole duration. During 2001-02, the company witnessed a loss of 1563.86 lakhs but after second round of funding the PAT starts increasing again. Overall the company has maintained an increasing profit trend.

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CURRENT RATIO

Figure 10: Current ratio of Sasken Ltd from 1999-00 to 2008-09

Interpretation
From 1999-00 to 2008-09, the Current Ratio has varied in the range of 2.5 to 3.9. Except in the year 2002-03 where current ratio increased to 3.9, the company has maintained its current ratio more or less same figure, which is very much significant. Over the funding period the company had enough current assets to meet the current liabilities.

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3.1.6. RATIO ANALYSIS

LIQUIDITY AND EFFICIENCY RATIOS

Year

Current Ratio

Average Collection period( Days)

Net Working Capital ratio 0.4 0.4 0.3 0.3 0.3 0.4 0.2 0.3 0.3 0.4 0.33

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Average

3.2 3.5 2.9 3.9 2.6 2.6 3.2 2.8 2.8 2.5 3

126 127 98 104 74 82 77 67 78 71 90.4

Table 6: Liquidity and efficiency ratios of Sasken Ltd.

It is evident from the table that from 1999-00 to 2008-09, the Current Ratio has varied in the range of 2.5 to 3.9. In the year 2002-03, the current ratio was 3.9 which can be attributed to the fact that there was a significant change in the total volume of current assets as well as current liabilities in the year 2002-03. It can be seen that company maintained adequate liquidity to cover its obligations during the funding period.

During the funding period the Net Working Capital ratio lie only in the range of 0.3 to 0.4, with an only exception in 2005-06, where it decreased to 0.2. On the whole the net working capital turnover of the company was at an average of 33% over the

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funding period. The companys average collection period changed from 126 days to 71 days, which suggests that accounts receivables are being converted to cash quickly.

PROFITABILITY RATIOS

Table 7: Profitability ratios of Sasken Ltd. PBT/Total turnover 33% 23% -11% 4% 10% 10% 10% 11% 10% 11% 11.1% PAT/Total turnover 20% 20% -14% 1% 11% 9% 7% 9% 7% 6% 7.6% Return on average capital employed 27% 28% -9% 4% 16% 18% 9% 11% 10% 10% 12.4% Sales to average net working capital 3.3 3.4 2.4 3.0 4.6 5.5 4.4 4.2 3.4 3.5 3.77

Year

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Average

From the table it can be seen that the PBT/Total Turnover decreased from 33% in 1999-00, to 23% in 2000-01 and to -11% in 2001-02. As far as PAT/ total Turnover is concerned, the trend is similar to PBT/Total Turnover.

After remaining constant on 20% in 1999-00 and 2000-01 it decreased to -14% in 2001-02. This is due to increased Depreciation and Amortization during the year 2001-02. After the second round of funding, an increasing trend was seen in the company.

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As far as Return on average capital employed is concerned a fluctuating trend was observed as it first adopted a decreasing trend and then increased after 2001-02. Overall the Return on average capital employed was positive for the funding period.

LEVERAGE RATIOS

Table 8: Leverage ratios of Sasken Ltd.

Year 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Debt Equity ratio 0.0 0.3 0.4 0.3 0.0 0.0 0.0 0.2 0.2 0.1

Total assets/Net worth 1.0 1.3 1.4 1.3 1.0 1.0 1.0 1.2 1.2 1.1

Interest Cover 17.9 21.6 -2.6 1.4 24.0 49.1 161.3 11.0 9.3 32.8

Debt Equity ratio was found to be below 1 showing the major source of finance to be equity for the company.

ANALYSIS OF PERFORMANCE OF R SYSTEMS LTD

R Systems strategic focus and commitment to developing expertise in key verticals was rewarded by strategic investments by Intel Capital in 2001. In the end of 2006 the venture capital firms exited from the company through Initial Public offering (IPO) route of exit.

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SALES

Figure 11: Sales of R System Ltd from 2001-02 to 2006-07

After the company received funding in 2001, the company recorded sales of INR 13,957 lakhs. But in the subsequent year the sales decreased to INR 12,247 lakhs but after that it took an upward trend.

From the entry of VCs in 2001 till their exit in 2007, the sales increased from INR 13,957 lakhs to INR 24,706 lakhs with a compounded annual growth rate of 12.10%. The investment has produced a stable return throughout its life, even if the investment was extremely volatile, fluctuating a great deal from year to year.

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PBIT

Figure 12: PBIT (in Rs Lakhs) from 2001-02 to 2006-07

Interpretation
Overall for the duration from 2001-02 to 2006-07, the Profit before Interest and Tax (PBIT), increased from 809 lakhs to 2895 lakhs, although a decrease in the PBIT was observed during 2002-03 where the company witnessed a decrease in PBIT.

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PAT

Figure 13: PAT (in Rs Lakhs) from 2001-02 to 2006-07

Interpretation
Overall for the duration from 2001-02 to 2006-07, the Profit After Tax (PAT), increased from 365 lakhs to 1897 lakhs, although a decrease in the PBIT was observed during 2002-03 where the company witnessed a loss of 367 lakhs. Overall the trend of PAT was pretty much fluctuating but for entire lock in period of VC funds the profit increased tremendously.

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CURRENT RATIO

Figure 14: Current Ratio of R Systems Ltd. from 2001-02 to 2006-07

Interpretation
From 2001-02 to 2006-07, an increasing trend can be observed in the Current Ratio. It increased from 2.29 to 2.93, except in the year 2005-06 where current ratio decreased in comparison to last year, to 2.72. The company has increased its current assets position significantly during the lock in period. Over the funding period the company had enough current assets to meet the current liabilities.

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RATIO ANALYSIS R SYSTEMS LTD

LIQUIDITY AND EFFICIENCY RATIOS Year Current Ratio Average Collection period( Days) 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Average 2.29 2.69 2.71 2.79 2.72 2.93 2.68 69 83 82 88 82 78 80.3

TaTable 9: Liquidity and efficiency ratios for R System Ltd.

It is evident from the table that from 2001-02 to 2006-07, the Current Ratio has varied in the range of 2.29 to 2.93. During the whole duration of lock in of funds, it can be seen that company maintained adequate liquidity to cover its obligations.

Overall the company had an average collection period of 80.3 days which is a significant figure determining the average number of days required to convert receivables into cash. Since here it has increased, it means company has not maintained level of account receivable being converted to liquid cash.

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PROFITABILITY RATIOS

Table 10: Profitability ratios for R System Ltd. Return on average capital employed 5.9% -5.1% 2.67% 21.98% 14.03% 16.95% 9.405%

Year

PBT/Total turnover

PAT/Total turnover

Return on Average Equity

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Average

3.5% -2.7% 0.5% 9.1% 6.7% 9.09% 4.36%

2.6% -3.0% 0.2% 7.9% 3.8% 7.46% 3.16%

4.3% -6.1% 0.45% 22.22% 8.26% 14.01% 7.19%

From the table it can be seen that the PBT/Total Turnover increased from 3.5% in 2001-02, to -2.7% in 2002-03 and then increased to 9.09% in 2006-07. As far as PAT/ total Turnover is concerned, the trend is similar to PBT/Total Turnover. It decreased to -3% in 2002-03 and then increased to 7.64% at the exit point of VCs. This is due to increased Depreciation and Amortization during the year 2002-03.

As far as Return on average capital employed is concerned a fluctuating trend was observed as it first adopted a decreasing trend. Overall the Return on average capital employed was positive for the funding period, except in 2002-03.

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LEVERAGE RATIOS

Year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Debt Equity ratio 0.0 0.11 0.29 0.17 0.04 0.01

Table 11: Leverage ratio for R Systems Ltd.

The Debt-Equity ratio was found to be below 1 for the whole funding period, showing the source of funds to be majorly equity

FINDINGS, RECOMMENDATIONS AND CONCLUSION

2.1. FINDINGS
Findings on Venture Capital market in India It can be deduced that Venture Capital market in India is growing at a very fast pace and India is one of the preferred destinations. According to 2010 Global Venture Capital Survey conducted by Deloitte, it was found that 85% of respondents which included large, mid-sized and small firms feel that Venture capital firms will grow in India. Venture capitalists in India expect their ecosystem to expand SEBI is the nodal regulator for VC funds in India providing a smooth, single window, problem-free regulatory framework for quick and efficient flow of money into VC funds in India.
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In 2010, a total of 324 VC investments took place in India with a total investment value of $7,958 million. In 2011, growth stage will get $295 million follow-on funding, late stage to get $986 million funding and buyout will get $1.39 billion funding. In 2015, the expected figures would be $478 million in late stage and $274 million in buyout, expecting a robust growth again. As per the sector-wise forecast, IT & ITES, manufacturing, healthcare and engineering & construction sectors are anticipated to witness $30-billion plus investment in 2011-2015. Private Firms, account for a majority of the VCPE firms operating in India (63%). Corporate Venture group constitute the second highest proportion of VCPE investors (14.2%). VCPE firms that were promoted by Financial Corporations, Investment Banks, and Government accounted for 11.2%, 8%, and 3.3% respectively. It was found that since 2007 to 2010, in India Real estate sector has been the major recipient of Venture Capital funds from both Indian Venture capitalists and foreign venture capitalists. The reason behind this could be the high return on investments in this sector. It was observed that there was an increasing trend in investments from 2007 to 2010 majorly in Information technology and telecommunications sector. It was followed by Biotechnology and Services sector. During 2010, apart from others sector, Real estate sector received the maximum venture capital funding both from Indian venture capital firms as well as foreign venture capital firms, followed by services sector.

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Findings on performance of Sasken Ltd. It was found that when the Venture capital entered the firm with its investment in 1999-00, the sales were INR 759.16 million and at the time of exit in 2008-09 it was INR 6978.19 million, recording a compounded annual growth rate of 24.83%. During the lock in period of funds from 1999-00 to 2008-09, Profit before Interest and Tax, was found to increase from INR 2162.3 lakhs to INR 12523.66 lakhs, an increase of 4.79 times. Profit after Tax from the time of entry to point of exit was found to increase from INR 1486.12 lakhs to INR 4230.41 lakhs, an increase of 1.84 times. The companys current ratio was found to have decreased from 3.9 at entry point of VC fund to 2.5 at the exit point but, over the funding period, the company had enough current assets to meet the current liabilities. The average Gross Profit Margin ratio and average Net profit Margin Ratio for the lock in period was found to be 11.1% and 7.6% respectively, which suggests that company generated adequate amount of earnings, required to pay fixed costs and profits, from revenues. The average Return on Capital Employed for the lock in period was found to be 12.4%, which tells that company is earned sufficient revenues and profits in order to make the best use of its capital assets during the duration for which VC funds were locked in. During the lock in period the average collection period decreased from 126 days in 1990-00 to 71 days in 2008-09, which suggests that account receivables are converted to cash quickly. This tells us the better position of business efficiency of the company.
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Macro Analysis of Venture Capital Funding

The Debt to Equity ratio was found to be below 1 for all 10 years, which indicates that equity was the major source of raising capital by the company. The impact of Venture Capital fund after the entry in the firm was found to be positive. The Sales, PBIT and PAT were found to have increased tremendously after the company received VC funds. The company maintained a substantial growth rate during the lock in period of funds. The VC firms also were able to make huge returns by capitalizing on investments for long period of time.

Findings on performance of R Systems Ltd. It was found that when the Venture capital entered the firm with its investment in 2001-02, the sales were INR 13,957 lakhs and at the time of exit in 2006-07 it was INR 24,706 lakhs, recording a compounded annual growth rate of 12.10%. The investment has produced a stable return throughout its life. During the lock in period of funds from 2001-02 to 2006-07, Profit before Interest and Tax, was found to increase from INR 809 lakhs to INR 2,895 lakhs, an increase of 2.57 times. Profit after Tax from the time of entry to point of exit was found to increase from INR 365 lakhs to INR 1,897 lakhs, an increase of 4.19 times. The companys current ratio was found to have increased from 2.29 at entry point of VC fund to 2.93 at the exit point, which implies that the company was able to utilize funds properly and was able to have sufficient liquidity.

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From point of entry till exit, average collection period increased from 69 days to 78 days, which tells that account receivables are not converted to cash quickly. This tells us that efficiency of the company has reduced.

The average Gross Profit Margin ratio average and Net profit Margin Ratio for the lock in period was found to be 4.36% and 3.16% respectively, which suggests that company generated adequate amount of earnings, required to pay fixed costs and profits, from revenues. increase was found in both from the point of entry till the point of exit. The average Return on Capital Employed for the lock in period was found to be 9.405%, which tells that company is earned sufficient revenues and profits in order to make the best use of its capital assets during the duration for which VC funds were locked in. The Debt to Equity ratio was found to be below 1 for all 10 years, which tells that equity was the major source of raising capital by the company. The impact of Venture Capital fund after the entry in the firm was found to be positive. The Sales, PBIT and PAT were found to have increased tremendously after the company received VC funds. An

RECOMMENDATIONS

1. The regulatory, tax and legal environment should play an enabling role. In India, an atmosphere of structural flexibility, fiscal neutrality and operational adaptability can make the Venture capital industry flourish much better.

2. There is a need for revamping of the system as, the Indian legal and regulatory environment continue to inhibit venture capital investors from maximizing their returns. The bureaucratic obstacles to the free operation
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of venture capital remain significant. There continues to be a confusing array of newly created statutes. 3. Efforts should be taken to make Venture capital institutionalized & organized sector in India, that protects investors and investee firms, operating in an environment suitable for raising the large amounts of risk capital needed and for spurring innovation. 4. Existence of Full capital account convertibility can help to overcome the factors that hamper venture capital inflows from offshore because specific, time-consuming governmental approvals from multiple agencies are required for each investment and disinvestment. Another significant issue that must be addressed to develop a vibrant venture capital industry is Indias foreign currency regulations. 5. Insurance companies and pension funds should be allowed as source of funds for VCs in India. Although corporate bodies have been allowed to invest their funds, allowing insurance companies and pension funds would enlarge the possibilities of setting up of domestic funds.

6. Financial innovations can be brought through new & better sources like ADRs/GDRs/IDRs a mode of entry in the Indian venture capital industry.

CONCLUSION

Venture Capital has emerged as a new method of financing during the 20th century. In India, apart from other countries also, the Venture Capital plays a vital role in the development and growth of innovative entrepreneurships. Today, venture capital industry is still in nascent stage in India. Still, India remains a difficult environment for venture capital. Even in 2011 the Indian government remains bureaucratic and highly regulated. To encourage the growth of venture capital will require further action, and it is likely that the government will continue and even accelerate its efforts to encourage venture capital investing.

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Macro Analysis of Venture Capital Funding

The study provided an insight in the investment made by Venture Capitalists in recent years. The analysis of companies as case study helped to gain an insight on the performance of the company from the time of entry, till the point of exit or in other words the lock in period. The impact can help to make judgments on the efficiency of VC funds.

In spite of some non attracting factors, India being an emerging market, provides lucrative returns on investment and is no doubt promising which is evident by large number of new entrants in past days. Nonetheless market is challenging for successful investment. Venture capitalists are upbeat about the attractiveness of India as a place to do business.

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Macro Analysis of Venture Capital Funding

BIBLIOGRAPHY
BOOKS: 1. Chary Satyanarayana T, (2005) Venture Capital Concepts and Applications, 1st edition, MacMillan, ISBN: 978-1-40-392679-1 2. Bartlett Joseph W. (1999) , Fundamentals of Venture Capital, Madison Books, ISBN: 978-1-56-833126-3

ARTICLES/ INDUSTRY REPORTS: 1. Performance of Venture Capital Undertakings A case Study by Dr. Satyanarayana Chary and Mr. T. Prasad. 2. IVCA Bain PEVC Report 2010 by IVCA and IIT 3. IVCA IIT-Madras PEVC Report 2010 by IVCA and IIT- Madras. 4. Paper titled Creating an environment: Developing Venture Capital in India by Rafiq Dossani and Martin Kenney. 5. VC_insights-and-trends-report_2010 published by Earnst & Young 6. CMIE Industry Reports 7. SEBI Industry Reports WEBSITES: 1. www.sebi.gov.in 2. http://en.wikipedia.org/wiki/Venture_capital 3. www.indiavca.org 4. www.ventureintelligence.in 5. www.ventureintelligence.blogspot.com

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