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Concept of venture capital The term Venture Capital is understood in many ways. In a narrow sense, if refers to, investment in new and tried enterprises that are lacking a stable record of growth. In a broader sense, venture capital refers to the commitment of capital as shareholding, for the formulation and setting up of small firms specializing in new ideas or new technologies. It is not merely an injection of funds into a new firm, it is a simultaneous input of skill needed to set up the firm, design its marketing strategy and organize and manage it. It is an association with successive stages of firms development with distinctive types of financing appropriate to each stage of development. Meaning of Venture Capital Venture capital is long-term risk capital to finance high technology projects which involve risk but at the same time has strong potential for growth. Venture capitalist pool their resources including managerial abilities to assist new entrepreneur in the early years of the project. Once the project reaches the stage of profitability, they sell their equity holdings at high premium.

Venture capital means funds made available for startup firms and small businesses with exceptional growth potential.
Venture capital is money provided by professionals who alongside management invest in young, rapidly growing companies that have the potential to develop into significant economic contributors.

Venture Capitalists generally: Finance new and rapidly growing companies Purchase equity securities Assist in the development of new products or services Add value to the company through active participation.

The SEBI has defined Venture Capital Fund in its Regulation 1996 as a fund established in the form of a company or trust which raises money through loans, donations, issue of securities or units as the case may be and makes or proposes to make investments in accordance with the regulations.

CHARACTERISTICS: Long time horizon Lack of liquidity High risk Equity participation Participation in management

ADVANTAGES OF VENTURE CAPITAL It injects long term equity finance which provides a solid capital base for future growth. The venture capitalist is a business partner, sharing both the risks and rewards. Venture capitalists are rewarded by business success and the capital gain. The venture capitalist is able to provide practical advice and assistance to the company based on past experience with other companies which were in similar situations. The venture capitalist also has a network of contacts in many areas that can add value to the company.

The venture capitalist may be capable of providing additional rounds of funding should it be required to finance growth. Venture capitalists are experienced in the process of preparing a company for an initial public offering (IPO) of its shares onto the stock exchanges or overseas stock exchange such as NASDAQ. They can also facilitate a trade sale.

STAGES OF FINANCE:

1. Seed Money: Low level financing needed to prove a new idea. 2. Start-up: Early stage firms that need funding for expenses associated with marketing and product development. 3. First-Round: Early sales and manufacturing funds. 4. Second-Round: Working capital for early stage companies that are selling product, but not yet turning a profit .

5.Third-Round:

Also called Mezzanine financing, this is expansion money for a newly profitable company 6. Fourth-Round: Also called bridge financing, it is intended to finance the "going public" process

VENTURE CAPITAL INVESTMENT PROCESS:

METHODS OF FINANCING VENTURE CAPITAL The financing pattern of the deal is the most important element. Following are the various methods of venture financing: Equity Conditional loan Income note Participating debentures Quasi euity

HOW DOES VENTURE CAPITAL WORKS:

Venture capital firms typically source the majority of their funding from large investment institutions. Investment institutions expect very high ROI

VCs invest in companies with high potential where they are able to exit through either an IPO or a merger/acquisition. Their primary ROI comes from capital gains although they also receive some return through dividend.

VENTURES CAPITAL IN INDIA. Venture capital as a source of the launch capital either of the American type or the slightly variant (in scope) British type is, by and large, conspicuous by its absence in India. There are, of course, some institutional venture capital funds/ schemes in operation in India. For instance, Industrial Finance Corporation of India set up the Risk Capital Foundation in 1975 with a view to providing special assistance to new entrepreneurs, particularly technologists and professionals for promoting medium-sized industrial projects. Further, with a view to assisting entrepreneurs who have skills but lack finance to bring in the requisite promoters contribution, Industrial Development Bank of India (IDBI) introduced two seed capital schemes, viz., State financial corporations special share capital schemes under which SFCs extend special share capital assistance to projects in the small-scale sector from their special class of share capital contributed jointly by the concerned state Government and IDBI and IDBIs own scheme for such assistance (operated mainly through State Industrial Development Corporation / State Financial corporation)_ in respect of medium-sized projects costing upto Rs.2 crores. In 1985 the IDBI introduced venture capital fund scheme to assist industrys efforts for technological advancements. Most of the ventures assisted by the Bank have been sponsored by professionally qualified entrepreneurs and the process/technology involved a wide range of new and indigenously developed ones.

In 1986, Industrial Credit and Investment Corporation of India (ICICI) also launched a venture capital scheme to encourage new techno crafts in the private sector in new fields of high technology with inherent risk. Under this scheme ICICI assists projects, with initial investment not exceeding Rs.2 crores, in the form of equity or conditional loan with flexible charges and repayment period or conventional loan. Two new fund were launched recently. The first one called India fund floated by the International Division of Merrill Lynch with subscription by non-resident Indians living mainly in the UK and Western Europe is managed by the UTI. The second one is the venture capital fund with an initial capital of Rs.10 crores established in December 1986 by IDBI to provide equity capital for pilot plants attempting commercial applications of indigenous technology and to adapt previously imported technology to wider domestic application. To undertake the task on a continuous and systematic basis, the Industrial Credit and Investment Corporation set up with the UTI The Technology Development and Information Company of India Ltd. (TDICI) in 1989. TDICT has started providing venture capital, R & D funds and technical and managerial services including Technology and Information. The ICICI also established in 1988 with UTI venture capital fund with Rs.20 crores, subscribed equally by ICICI and UTI. The fund is being used for providing assistance mainly in the form of equity, conditional loans and convertible debenture, to set up technological ventures which have potential for fast growth. In January, 1990 ICICI and UTI have jointly launched their second venture fund for Rs.100 crores. It is interesting to note that the commonwealth Development Corporation of the U.K. will also be participating in this fund. Among commercial banks, State Bank of India, Canara Bank and Grind lays Bank have shown interest in this area. SBIs merchant banking subsidiary, SBI capital markets invests in the equity shares of new and unknown

companies. Canara Bank has also set up a venture capital fund through its subsidiary, viz., (as bank financial Services) Grind lays Bank launched India investment fund to provide venture capital assistance to high risk projects. In July, 1990 The Gujarat Industrial Corporation Ltd., launched a venture capital finance scheme through a newly registered subsidiary with the help of the Capital Trust Fund worth Rs.24 crores to cater to projects which will enhance the growth of the national economy. The new subsidiary Gujarat Venture Finance Ltd. would financially support the entrepreneur having both indigenous and imported technologies not tried before in the country. This organization would finance venture capital entirely through equity participation. In private sector a few venture capital funds have been established. One such fund is Indus Venture Capital Fund (IVCF). This venture capital has been set up with a capital of Rs. 21 crore contributed by several Indian and international institutions. The fund provides both equity capital as well as managerial support to entrepreneurs. The other private venture capital firms set up in India are Credit Capital Venture Fund, Twentieth Century Finance Company and Infrastructure Leasing and Financial Services Ltd. The above venture capital funds / schemes are essential in the nature of equity assistance funds/schemes. There are no full- fledged individual corporate or institutional venture capitalist in India offering a broad spectrum of multi-faced specialist services like the venture capitalist in the U.S. or U.K. Further, having regards to the mammoth task to be performed by venture capital finance in India, the size of the fund would appear to be too small.

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DEVELOPMEMR OF VENTURE CAPITAL IN INDIA:

The concept of venture capital was formally introduced in India in 1987 by IDBI. The government levied a 5 per cent cess on all know-how import payments to create the venture fund. ICICI started VC activity in the same year Later on ICICI floated a separate VC company TDICI

VENTURE CAPITAL FUNDS IN INDIA: VCFs in India can be categorized into following five groups: 1) Those promoted by the Central Government controlled development finance institutions. For example: - ICICI Venture Funds Ltd. - IFCI Venture Capital Funds Ltd (IVCF) - SIDBI Venture Capital Ltd (SVCL)

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2) Those promoted by State Government controlled development finance institutions. For example: - Punjab Infotech Venture Fund - Gujarat Venture Finance Ltd (GVFL) - Kerala Venture Capital Fund Pvt Ltd. 3) Those promoted by public banks. For example: - Canbank Venture Capital Fund - SBI Capital Market Ltd 4)Those promoted by private sector companies. For example: - IL&FS Trust Company Ltd - Infinity Venture India Fund 5)Those established as an overseas venture capital fund. For example: - Walden International Investment Group - HSBC Private Equity management Mauritius Ltd

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RULES BY SEBI: VCF are regulated by the SEBI (Venture Capital Fund) Regulations, 1996. The following are the various provisions: 1. A venture capital fund may be set up by a company or a trust, after a certificate of registration is granted by SEBI on an application made to it. On receipt of the certificate of registration, it shall be binding on the venture capital fund to abide by the provisions of the SEBI Act, 1992 2. A VCF may raise money from any investor, Indian, Non-resident Indian or foreign, provided the money accepted from any investor is not less than Rs 5 lakhs. The VCF shall not issue any document or advertisement inviting offers from the public for subscription of its security or units

3. SEBI regulations permit investment by venture capital funds in equity or equity related instruments of unlisted companies and also in financially weak and sick industries whose shares are listed or unlisted

4. At least 80% of the funds should be invested in venture capital companies and no other limits are prescribed. 5. SEBI Regulations do not provide for any sectoral restrictions for investment except investment in companies engaged in financial services.

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6. A VCF is not permitted to invest in the equity shares of any company or institutions providing financial services. 7. The securities or units issued by a venture capital fund shall not be listed on any recognized stock exchange till the expiry of 4 years from the date of issuance . 8. A Scheme of VCF set up as a trust shall be wound up : (a) when the period of the scheme if any, is over (b) If the trustee are of the opinion that the winding up shall be in the interest of the investors (c) 75% of the investors in the scheme pass a resolution for winding up or, (d) If SEBI so directs in the interest of the investors.

VENTURE CAPITAL INDUSTRY WISE SEGMENTATION IN INDIA:

Percentage
9.03 3.36 12.92 6.94 7.73 IT & ITES Energy Manufacturing
11.5

Media & Ent. BFSI Shipping & logistics Eng. & Const. Telecom Health care

4.32 11.43 4.82 27.95

Others

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GROWTH OF VENTURE CAPITAL IN INDIA:

16000
14234

450
387

14000 12000 10000 8000 6000

146

400 350

299 280

300 250

7500 6390 170

200 150 100

4000 2000 0 2000

1160

110 78 56 937 591 470 71 1650 2200

50 0

2001

2002

2003

2004

2005

2006

2007

Value of deals

1st half of 2008

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FUTURE OF VENTURE CAPITAL IN INDIA

Rapidly changing economic environment accelerated by the high technology explosion, emerging needs of new generation of entrepreneurs in the process and inadequacy of the existing venture capital funds/schemes are indicative of the tremendous scope for venture capital in India and pointers to the need for the creation of a sound and broad-based venture capital movement India. There are many entrepreneurs in India with a good project idea but no previous entrepreneurial track record to leverage their firms, handle customers and bankers. Venture capital can open a new window for such entrepreneurs and help them to launch their projects successfully. With rapid international march of technology, demand for newer technology and products in India has gone up tremendously. the pace of development of new and indigenous technology in the country has been slack in view of the fact that several process developed in laboratories are not commercialized because of unwillingness of people to take entrepreneurial risks, i.e. risk their funds as also undergo the ordeal of marketing the products and process. In such a situation, venture financing assumes more significance. It can act not only act as a financial catalyst but also provide strong impetus

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for entrepreneurs to develop products involving newer technologies and commercialize them. This will give a fillip to the development of new technology and would go a long way in broadening the industrial base, creation of jobs, provide a thrust to exports and help in the overall enrichment of the economy. In addition, venture capital will be needed urgently to solve the serious problems of sickness which has plagued many Indian Industries. There are large number o sick companies which offer opportunities for turn-around, either through a change in the product line or use of existing facilities in a different way or in any other manner. What is needed is the supply of equity to persons who have fertile ideas, necessary expertise and competence and who can bring about improvements in some units. Another type of situation commonly found in our country is where the local group and a multi-national company may be ready to enter into a joint venture but the former does not have sufficient funds to put up its share of the equity and the latter is restricted to a certain percentage. For the personal reasons or because of competition, the local group may not be keen to invite any one in its industry or any major private investor to contribute equity and may prefer a venture capital company, as a less intimately involved and temporary shareholder. Venture capitalists can also lend their expertise and standing to the entrepreneurs. A large number of smaller units serving as ancillaries to major industrial groups need capital, expertise and contacts of venture capitalist for upgradation of their technology in tune with the demands from the major industrial units. It is generally found that small suppliers are faced with a choice of going out of business, losing their major client, being acquired by the client or obtaining at an exorbitant rate from a source outside the industry. Venture capitalist can help these units and save them from the crisis. In service sector, which has Immense growth prospects in India, venture capitalists can play significant role in tapping its potentiality to the full. For

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instance, venture capitalists can provide capital and expertise to organizations selling antique, remodeled jewellery, builders of resort hotels, baby and health care market, retirement homes and small houses. In view of the above, it will be desirable to establish a separate national venture capital fund tow which the financial institutions and banks can contribute. In scope and content such a national venture capital fund should cover: (i) all the aspects of venture capital financing in all the three stages of conceptual, developmental an exploitation phases in the process of commercialization of the technological innovation and (ii) as may of the risk stages-development, manufacturing, marketing, management and growth as possible under Indian Conditions. The fund should offer a comprehensive package of technical, commercial, managerial and financial assistance and services to building entrepreneurs and be a position to offer innovative solutions to the varied problems faced by them in business promotion, transfer and innovation. To this end, the proposed national venture capital fund should have at its command multi-disciplinary technical expertise. The major thrust of this fund should be on the promotion of viable new business in India to take advantage of the on coming high technology revolution and setting up of high growth industries so as to take the Indian economy to commanding heights.

VC can help in the rehabilitation of sick units. VC can assist small ancillary units to upgrade their technologies VCFs can play a significant role in developing countries in the service sector including tourism, publishing, health care etc. They can provide financial assistance to people coming out of universities, technical institutes, etc thus promoting entrepreneurial spirits

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PREREQUISITES TO SUCCESS OF VENTURE CAPITAL IN INDIA. The success of venture capital in India requires the following: An entrepreneurial tradition must be more broad based and less family based. Attractive customer opportunities of high-technology type should be created. Tax policies need to be carefully scrutinized to eliminate those provisions which work heavily against the emergence of risk capital. There has to be some institutional changes which offer the venture capitalist the opportunity to off load the investment. Disinvestment avenues have to be positively encouraged and in this both the government and the securities markets have to play a positive role. The association of venture capital with high technological and investment opportunities must be declined. There is need for venture capital for development of many products and services which are relevant to our country and which can be produced with less domestic technological innovation and smaller domestic markets.

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Conclusion

In recent years the growth of Venture Capital Business has been drastically decreasing due to many reasons. The regulator has to liberalize the stringent policies and pave the way to the venture capital investors to park their funds in most profitable ventures. Though an attempt was also made to raise funds from the public and fund new ventures, the venture capitalists had hardly any impact on the economic scenario for the next few years. At present many investments of venture capitalists in India remain on paper as they do not have any means of exit. Appropriate changes have to be made to the existing systems in order that venture capitalists find it easier to realize their investments after holding on to them for a certain period of time.