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INTRODUCTION

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 isattended 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 wascoined.

Venture capital is considered as financing of high and new technology based enterprises.It is said that Venture capital involves investment in new or relatively untried technology,initiated by relatively new and professionally or technically qualified entrepreneurs withinadequate funds. The conventional financiers, unlike Venture capitals, mainly financeproven technologies and established markets. However, high technology need not be pre-requisite for venture capital.

Venture capital has also been described as unsecured risk financing. The relativelyhigh risk of venture capital is compensated by the possibility of high returns usuallythrough substantial capital gains in the medium term. Venture capital in broader sense isnot solely an injection of funds into a new firm, it is also an input of skills needed to setup the firm, design its marketing strategy, organize and manage it. Thus it is a long termassociation with successive stages of companys development under highly riskinvestment conditions, with distinctive type of financing appropriate to each stage ofdevelopment. Investors join the entrepreneurs as co-partners and support the project withfinance and business skills to exploit the market opportunities.

Venture capital is not a passive finance. It may be at any stage of business/production

cycle, that is, start up, expansion or to improve a product or process, which are associatedwith both risk and reward. The Venture capital makes higher capital gains throughappreciation in the value of such investments when the new technology succeeds. Thusthe primary return sought by the investor is essentially capital gain rather than steadyinterest income or dividend yield.

The most flexible definition of Venture capital is-

The support by investors of entrepreneurial talent with finance andbusiness skills to exploit market opportunities and thus obtain capital gains.

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CONCEPTUAL FRAMEWORK

Concept of Venture Capital

Venture capital commonly describes not only the provision of start up finance or seedcorn capital but also development capital for later stages of business. A long termcommitment of funds is involved in the form of equity investments, with the aim ofeventual capital gains rather than income and active involvement in the management ofcustomers business.

Features of Venture Capital

High Risk

By definition the Venture capital financing is highly risky and chances of failure are highas it provides long term start up capital to high risk-high reward ventures. Venture capitalassumes 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.

Operation risk - Operations may not be cost effective resulting inincreased cost decreased gross margins.

High Tech

As opportunities in the low technology area tend to be few of lower order, and hi-techprojects generally offer higher returns than projects in more traditional areas, venturecapital investments are made in high tech. areas using new technologies or producinginnovative goods by using new technology. Not just high technology, any high riskventures where the entrepreneur has conviction but little capital gets venture finance.Venture capital is available for expansion of existing business or diversification to a high

risk area. Thus technology financing had never been the primary objective but incidentalto venture capital.

Equity Participation & Capital Gains

Investments are generally in equity and quasi equity participation through direct purchaseof shares, options, convertible debentures where the debt holder has the option to convertthe loan instruments into stock of the borrower or a debt with warrants to equityinvestment. The funds in the form of equity help to raise term loans that are cheapersource of funds. In the early stage of business, because dividends can be delayed, equityinvestment implies that investors bear the risk of venture and would earn a return

commensurate with success in the form of capital gains.

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Participation In Management

Venture capital provides value addition by managerial support, monitoring and follow upassistance. It monitors physical and financial progress as well as market developmentinitiative. It helps by identifying key resource person. They want one seat on the

companys board of directors and involvement, for better or worse, in the major decisionaffecting the direction of company. This is a unique philosophy of hands onmanagement where Venture capitalist acts as complementary to the entrepreneurs. Basedupon the experience other companies, a venture capitalist advise the promoters on projectplanning, monitoring, financial management, including working capital and public issue.

Length of Investment

Venture capitalist help companies grow, but they eventually seek to exit the investment inthree to seven years. An early stage investment may take seven to ten years to mature,while most of the later stage investment takes only a few years. The process of having

significant returns takes several years and calls on the capacity and talent of venturecapitalist and entrepreneurs to reach fruition.

Illiquid Investment

Venture capital investments are illiquid, that is, not subject to repayment on demand orfollowing a repayment schedule. Investors seek return ultimately by means of capitalgains when the investment is sold at market place. The investment is realized only onenlistment of security or it is lost if enterprise is liquidated for unsuccessful working. Itmay take several years before the first investment starts to locked for seven to ten years.Venture capitalist understands this illiquidity and factors this in his investment decisions.

Difference between Venture Capital & Other Funds

Venture Capital Vs Development Funds

Venture capital differs from Development funds as latter means putting up of industrieswithout much consideration of use of new technology or new entrepreneurial venture buthaving a focus on underdeveloped areas (locations). In majority of cases it is in the formof loan capital and proportion of equity is very thin. Development finance is securityoriented and liquidity prone. The criteria for investment are proven track record of

company and its promoters, and sufficient cash generation to provide for returns(principal and interest). The development bank safeguards its interest through collateral.

Venture Capital Vs Seed Capital & Risk Capital

It is difficult to make a distinction between venture capital, seed capital, and risk capitalas the latter two form part of broader meaning of Venture capital. Difference betweenthem arises on account of application of funds and terms and conditions applicable. Theseed capital and risk funds in India are being provided basically to arrange promoterscontribution to the project. The objective is to provide finance and encourageprofessionals to become promoters of industrial projects. The seed capital is provided to

conventional projects on the consideration of low risk and security and use conventionaltechniques for appraisal. Seed capital is normally in the form of low interest deferred loan

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as against equity investment by Venture capital. Unlike Venture capital, Seed capitalproviders neither provide any value addition nor participate in the management of theproject. Unlike Venture capital Seed capital provider is satisfied with low risk-normalreturns and lacks any flexibility in its approach.

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

Seed Capital Scheme Venture capital SchemeBasis Income or aid Commercial viabilityBeneficiaries Very small entrepreneurs Medium and large

entrepreneurs are alsocovered

Size of assistance Rs. 15 Lac (Max) Up to 40 percent of promoters equity

Appraisal process Normal Skilled and specializedEstimates returns 20 percent 30 percent plusFlexibility Nil Highly flexibleValue addition Nil Multiple waysExit option Sell back to promoters Several ,including Public

offerFunding sources Owner funds Outside contribution

allowedSyndication Not done PossibleTax concession Nil Exempted

Success rate Not good Very satisfactory

Table 1.1: Difference between Seed Capital Scheme and Venture capital Scheme

Venture Capital Vs Bought Out Deals

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

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The Venture Capital Spectrum

The growth of an enterprise follows a life cycle as shown in the diagram below. Therequirements of funds vary with the life cycle stage of the enterprise. Even before abusiness plan is prepared the entrepreneur invests his time and resources in surveying themarket, finding and understanding the target customers and their needs.

Figure 2.1: Venture Capital Spectrum

Venture capital was started as early stage financing of relatively small but rapidlygrowing companies. However various reasons forced venture capitalists to be more andmore involved in expansion financing to support the development of existing portfoliocompanies. With increasing demand of capital from newer business, Venture capitalistsbegan to operate across a broader spectrum of investment interest. This diversity ofopportunities enabled Venture capitalists to balance their activities in term of timeinvolvement, risk acceptance and reward potential, while providing on going assistance todeveloping business.

Different venture capital firms have different attributes and aptitudes for different types ofVenture capital investments. Hence there are different stages of entry for different

Venture capitalists and they can identify and differentiate between types of Venture

5

FamilyPartners

IPO

Start up

PersonalAngelInvestor

VentureCapital

PrivateEquity

PublicEquity

Public Equity forRestructuringBuyouts

TimeConcept

ProductDevelopment

Expansion

Building a sustainable business

BusinessPlan

Seed Capital

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capital investments, each appropriate for the given stage of the investee company, Theseare:-

1. Early Stage Finance

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

2. Later Stage Finance Expansion/Development Stage Capital Replacement Finance Management Buy Out and Buy ins Turnarounds

Mezzanine/Bridge Finance

Not all business firms pass through each of these stages in a sequential manner. Forinstance seed capital is normally not required by service based ventures.The table below shows risk perception and time orientation for different stages of venturecapital financing.

Financing Stage Period (funds

locked in years)Riskperception

Activity to be financed

Early stage financeSeed

7-10 Extreme For supporting a concept or idea or R & D for productdevelopment

Start up 5-9 Very high Initializing operations or developing prototypes

First stage 3-7 High Start commercial productionand marketing

Second stage 3-5 Sufficientlyhigh

Expand market & growingworking capital need

Later stage finance 1-3 Medium Market expansion,

acquisition & productdevelopment for profitmaking company

Buy out-in 1-3 Medium Acquisition financing

Turnaround 3-5 Medium to high Turning around a sick company

Mezzanine 1-3 Low Facilitating public issue

Table 1.2: Venture Capital- Financing Stages

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Seed Capital

It is an idea or concept as opposed to a business. European Venture capital associationdefines seed capital as The financing of the initial product development or capital

provided to an entrepreneur to prove the feasibility of a project and to qualify forstart up capital.

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

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

Start up Capital

It is stage 2 in the venture capital cycle and is distinguishable from seed capitalinvestments. An entrepreneur often needs finance when the business is just startingStart up capital is defined as: Capital needed to finance the product development, initialmarketing and establishment of product facility.

The characteristics of start-up capital are:-

i. Establishment of company or business. The company is either being organized or isestablished recently. New business activity could be based on experts, experience or a

spin-off from R & D.

ii. Establishment of most but not all the members of the team. The skills and fitness tothe job and situation of the entrepreneurs team is an important factor for start up finance.

iii. Development of business plan or idea. The business plan should be fully developedyet the acceptability of the product by the market is uncertain. The company has not yetstarted trading.

Early Stage Finance

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

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

The characteristics of early stage finance may be: -

Little or no sales revenue. Cash flow and profit still negative.

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A small but enthusiastic management team which consists of people with technicaland specialist background and with little experience in the management of growingbusiness.

Short term prospective for dramatic growth in revenue and profits.

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

Second Stage Finance

It is the capital provided for marketing and meeting the growing working capital needs ofan enterprise that has commenced the production but does not have positive cash flowssufficient to take care of its growing needs.

The characteristics of a second stage finance are:

A developed product on the market A full management team in place Sales revenue being generated from one or more products There are losses in the firm or at best there may be a break even but thesurplus generated is insufficient to meet the firms needs.

Later Stage Finance

It is called third stage capital is provided to an enterprise that has established commercialproduction and basic marketing set-up, typically for market expansion, acquisition,product development etc. It is provided for market expansion of the enterprise. The

enterprises eligible for this round of finance have following characteristics.

I. Established business, having already passed the risky early stage.II. Expanding high yield, capital growth and good profitability.III. Reputed market position and an established formal organization structure.

There are four sub divisions of later stage finance.

Expansion / Development Finance Replacement Finance Buyout Financing Turnaround Finance

Expansion / Development Finance

An enterprise established in a given market increases its profits exponentially byachieving the economies of scale. This expansion can be achieved either through anorganic growth, that is by expanding production capacity and setting up properdistribution system or by way of acquisitions. Anyhow, expansion needs finance andventure capitalists support both organic growth as well as acquisitions for expansion.

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At this stage the real market feedback is used to analyze competition. It may be found thatthe entrepreneur needs to develop his managerial team for handling growth and managinga larger business.Replacement Finance

It means substituting one shareholder for another, rather than raising new capital resultingin the change of ownership pattern. Venture capitalist purchase shares from theentrepreneurs and their associates enabling them to reduce their shareholding in unlistedcompanies. They also buy ordinary shares from non-promoters and convert them topreference shares with fixed dividend coupon. Later, on sale of the company or its listingon stock exchange, these are re-converted to ordinary shares. Thus Venture capitalistmakes a capital gain in a period of 1 to 5 years.

Buy - out / Buy - in Financing

It is a recent development and a new form of investment by venture capitalist. The funds

provided to the current operating management to acquire or purchase a significant shareholding in the business they manage are called management buyout.Management Buy-in refers to the funds provided to enable a manager or a group ofmanagers from outside the company to buy into it.

Turnaround Finance

It is rare form later stage finance which most of the venture capitalist avoid because ofhigher degree of risk. When an established enterprise becomes sick, it needs finance aswell as management assistance foe a major restructuring to revitalize growth of profits.Unquoted company at an early stage of development often has higher debt than equity; itscash flows are slowing down due to lack of managerial skill and inability to exploit themarket potential.

Bridge Finance

It is the pre-public offering or pre-merger/acquisition finance to a company. It is the lastround of financing before the planned exit. Venture capitalist help in building a stable andexperienced management team that will help the company in its initial public offer. Mostof the time bridge finance helps improves the valuation of the company. Bridge financeoften has a realization period of 6 months to one year and hence the risk involved is low.

The bridge finance is paid back from the proceeds of the public issue.

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VENTURE CAPITAL IN INDIA

Evolution of VC Industry in India

The first major analysis on risk capital for India was reported in 1983. It indicated thatnew companies often confront serious barriers to entry into capital market for raisingequity finance which undermines their future prospects of expansion and diversification.It also indicated that on the whole there is a need to revive the equity cult among themasses by ensuring competitive return on equity investment. This brought out the

institutional inadequacies with respect to the evolution of venture capital.In India, the Industrial finance Corporation of India (IFCI) initiated the idea of VC whenit established the Risk Capital Foundation in 1975 to provide seed capital to small andrisky projects. However the concept of VC financing got statutory recognition for the firsttime in the fiscal budget for the year 1986-87.

The Venture Capital companies operating at present can be divided into four groups: Promoted by All India Development Financial Institutions Promoted by State Level Financial Institutions Promoted by Commercial banks Private venture Capitalists.

Promoted by all India development financial institutions

The IDBI started a VC fund in 1987 as per the long term fiscal policy of government ofIndia, with an initial capital of Rs. 10 cr which raised by imposing a cess of 5% on allpayments made for the import of technology know- how projects requiring funds fromrs.5 lacs to rs 2.5 cr were considered for financing. Promoters contribution ranged fromthis fund was available at a concessional interest rate of 9% ( during gestation period)which could be increased at later stages.

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The ICICI provided the required impetus to VC activities in India, 1986, it startedproviding VC finance in 1998 it promoted, along with the Unit Trust of India (UTI)Technology Development and Information Company of India (TDICI) as the first VCcompany registered under the companies act, 1956. The TDICI may provide financialassistance to venture capital undertakings which are set up by technocrat entrepreneurs, or

technology information and guidance services.

The risk capital foundation established by the industrial finance corporation of India(IFCI) in 1975, was converted in 1988 into the Risk Capital and Technology Financecompany (RCTC) as a subsidiary company of the ifci the rctc provides assistance in theform of conventional loans, interest free conditional loans on profit and risk sharingbasis or equity participation in extends financial supoort to high technology projects fortechnological upgradations. The RCTC has been renamed as IFCI Venture Capital FundsLtd.(IVCF)

Promoted by State Level Financial InstitutionsIn India, the State Level financial institutions in some states such as Madhya Pradesh,Gujarat, Uttar Prades, etc., have done an excellent job and have provided VC to a smallscale enterprises. Several successful entrepreneurs have been the beneficiaries of theliberal funding environment. In 1990, the Gujarat Industrial Investment Corporation,promoted the Gujarat Venture Financial Ltd.(GVFL) along with other promoters such asthe IDBI, the World Bank, etc. The GVFL provides financial assistance to businesses inthe form of equity, conditional loans or income notes for technologies development andinnovative products. It also provides finance assistance to entrepreneurs.

The government of Andhra Pradesh has also promoted the Andhra Pradesh IndustrialDevelopment Corporation (APIDC) venture capital ltd. To provide VC financing inAndhra Pradesh.

Promoted by commercial banks

Canbank Venture Capital Fund, State Bank Venture Capital Fund and Grindlays bankVenture Capital Fund have been set up by the respective commercial banks to undertakevc activities.

The State Bank Venture Capital Funds provides financial assistance for bought out dealas well as new companies in the form of equity which it disinvests after thecommercialization of the project.

Canbank Venture Capital Fund provides financial assistance for proven but yet to bcommercially exploited technologies. It provides assistance both in the form of equity andconditional loans.

Private Venture Capital Funds

Several private sector venture capital funds have been established in India such as the 20th

Centure Venture Capital Company, Indus Venture Capital Fund, Infrastructure Leasingand Financial Services Ltd.

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Some of the companies that have received funding through this route include: Mastek, on of the oldest softwear house in India Ruskan software, Pune based software consultancy SQL Star, Hyderabad-based training and software development consultancy Satyam infoway, the first private ISP in India Hinditron, makers of embedded software Selectia, provider of interactive software selectior Yantra, ITLInfosys US subsidiary, solution for supply chain management Rediff on the Net, Indian website featuring electronic shopping, news,chat etc.

INDUSTRY LIFE CYCLE:

From the industry life cyle we can know in which stage we are standing. On the

basis of this management can make future strategies of their business.

Figure:1.3 Industry life cycle

The growth of VC in India has four separate phases:

Phase I - Formation of TDICI in the 80s and regional funds as GVFL & APIDC in theearly 90s.

The first origins of modern venture capital in India can be traced to the setting up of aTechnology Development Fund in the year 1987-88, through the levy of access on alltechnology import payments. Technology Development Fund was started to providefinancial support to innovative and high risk technological programmes through theIndustrial Development Bank of India.

The first phase was the initial phase in which the concept of VC got wider acceptance.The first period did not really experience any substantial growth of VCs. The 1980swere marked by an increasing disillusionment with the trajectory of the economic systemand a belief that liberalization was needed. The liberalization process started in 1985 in a

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INTRODUCTION GROWTH

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limited way. The concept of venture capital received official recognition in 1988 with theannouncement of the venture capital guidelines.

During 1988 to 1992 about 9 venture capital institutions came up in India.

Technology involved should be new, relatively untried, very closely held, in theprocess of being taken from pilot to commercial stage or incorporate some significantimprovement over the existing ones in India

Promoters / entrepreneurs using the technology should be relatively new,professionally or technically qualified, with inadequate resources to finance theproject.

Between 1988 and 1994 about 11 VC funds became operational either throughreorganizing the businesses or through new entities.

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

The second phase of VC growth attracted many foreign institutional investors.During thisperiod overseas and private domestic venture capitalists began investing in VCF. The newregulations in 1996 helped in this. Though the changes proposed in 1996 had a salutaryeffect, the development of venture capital continued to be inhibited because of theregulatory regime and restricted the FDI environment. To facilitate the growth of venturefunds, SEBI appointed a committee to recommend the changes needed in the VC fundingcontext. This coincided with the IT boom as well as the success of Silicon Valley start-

ups. In other words, VC growth and IT growth co-evolved in IndiaPhase III - (2000 onwards) - VC becomes risk averse and activity declines:

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

Phase IV 2004 onwards - Global VCs firms actively investing in India

Since Indias economy has been growing at 7%-8% a year, and since some sectors,including the services sector and the high-end manufacturing sector, have been growing at12%-14% a year, investors renewed their interest and started investing again in 2004. Thenumber of deals and the total dollars invested in India has been increasing substantially.

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Growth of venture capital in India

Growth of VC in India

1160 937591 470

2200

7500

14234

6390

1650

280

110

78

146

299

170

387

71

56

0

2000

4000

6000

8000

10000

12000

14000

16000

2000 2001 2002 2003 2004 2005 2006 2007 1st half

of 2008

0

50

100

150

200

250

300

350

400

450

Value of deals No.of deals

USD Million No. of Deals

Figure:1.4 Growth of Venture capital in india

The venture capital is growing 43% CAGR. However, in spite of the venturecapital scenario improving, several specific VC funds are setting up shop in India,with the year 2006 having been a landmark year for VC funding in India. The totaldeal value in 2007 is 14234 USD Million. The NO. of deals are increasing year byyear. The no. of deals in 2006 only 56 and now in 2007 it touch the 387 deals. Theintroduction stage of venture capital industry in India is completed in 2003 afterthat growing stage of Indian venture capital industry is started.

There are 160 venture capital firms/funds in India. In 2006 it is only but in 2007the number of venture capital firms are 146. The reason is good position of capitalmarket. But in 2008 no. of venture capital firms increase by only 14. the reason iscrashdown of capital market by 51% from January to November 2008. The No. ofventure capital funds are increasing year by year.

2000 2001 2002 2003 2004 2005 2006 2007 2008841 77 78 81 86 89 105 146 160

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Venture capital growth and industrial clustering have a strong positive correlation.Foreign direct investment, starting of R&D centres, availability of venture capitaland growth of entrepreneurial firms are getting concentrated into five clusters. Thecost of monitoring and the cost of skill acquisition are lower in clusters, especiallyfor innovation. Entry costs are also lower in clusters.The venture capital firm invest their money in most developing sectors like healthcare, IT-ITes,, telecom, Bio-technology, Media& Entretainment, shipping &ligistics etc.

2007 VC INVESTMENTS BY INDUSTRY TOTAL

US$14.2Bn

9881638

3979

1628478

1101

616

685

1839

1284

IT&ITES ManufacturingBFSI Eng & ConstructionHealthcare & l ifesciences EnergyMedia&Entert inment Shipping&Logist icsTelecom Others

Source : TSJ Venture Intelligence India

Figure: 1.5 Total sector wise venture capital investment-2007Now venture capital is nascent stage in india. Now due to growth of this sector, theventure capital industry is also grow. The top most player in the industries areICICI venture capital fund, Avishhkar venture capital fund, IL&FS venture capitalfund, Canbank.

Venture Capital investment in, 2008.

Venture Capital firms invested $274 million over 49 deals in India during the threemonths ending September 2008. The VC investment activity during the period wassignificantly higher compared to the same quarter last year (which had witnessed 36investments worth $252 million) as well as the immediate previous quarter ($165 millioninvested across 28 deals).

The latest numbers take the total VC investments in the first nine months of 2008 to $661million (across 108 deals) as against the $648 million (across 97 deals) during the

corresponding period in 2007.

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Top Investments

The largest investment reported during Q3 2008 was the $18 million raised by onlinetutoring services provider TutorVista from existing investors Sequoia Capital India andLightSpeed Ventures.

Investments by Industry

Information Technology and IT-Enabled Services -Enabled Services (IT & ITES)industry retained its status as the favorite among VC investors during Q3 08.

VC Investments by Industry

Industry VolumeQ3 08

No. of Deals

YTD**

ValueQ3 08

(US $ M)YTD

IT & ITES 25 58 147 361

BFSI 5 8 34 54

Engg & Construction 3 4 23 33

Healthcare & LifeSciences

6 12 4 52

Education 2 3 17 23Other Services 1 6 15 29

Manufacturing 2 2 13 13

Media 2 5 11 19

Energy 2 6 6 48

Travel & Transport 1 2 4 14

Retail - 1 - 10

Telecom - 1 - 5

Table: 1.6 Venture capital investment by industry

Led by the $12 million investment by Bellwether and others into Chennai-basedmicrofinance firm Equitas, BFSI emerged as the second largest (in value terms) for VCinvestments during the period.

Top VC Investments

Company

TutorVista

Sector

Online Services(Remote Tutoring)

Amount(US$ M)

18.0

Investors

Sequoia Capital India,Lightspeed Ventures

ConnectivaSystems

Communications Tech(Revenue Assurance)

17.0 IFC, NEA-IUV, SAPVentures, Others

SeventymmOnline Services (VideoRental)

12.0 NEA-IUV, ePlanetVentures, Matrix PartnersIndia,DFJ

Equitas MicroFinance

Microfinance 12.0 Bellwether, Others

HaloSource Water Purifiers 11.5 Origo Sino-India, UnileverTech Ventures

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INVESTMENT BY INDUSTRY (Q3 ' 08)

54%

12%

8%2%

6%

6%

5% 4%2%1%

IT & ITES BFSI

Engg & Construction Healthcare & Life Sciences

Education Other Services

Manufacturing Media

Energy Travel & Transport

Figure: 1.7 investment by industry Q3,2008

Investment by Stage

About 67% of VC investments during Q3 08 were in the early stage segment.

VC Investments by Stage

Stage of CompanyDevelopment Volume

Q3 '08 YTD

ValueQ3 '08 YTD

Early 33 67 172 339

Growth 16 41 102 322

Table: 1.8 Venture investment by stage

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STAGE WISE INVESTMENT

67%

33%

EARLY LATER

Figure: 1.9 Stage wise investment

Need for growth of venture capital in India

In India, a revolution is ushering in a new economy, wherein entrepreneurs mind set istaking a shift from risk averse business to investment in new ideas which involve highrisk. The conventional industrial finance in India is not of much help to these newemerging enterprises. Therefore there is a need of financing mechanism that will fit withthe requirement of entrepreneurs and thus it needs venture capital industry to grow inIndia.

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

Innovation : needs risk capital in a largely regulated,conservative, legacy financial system

Job creation: large pool of skilled graduates in the firstand second tier cities

Patient capital: Not flighty, unlike FIIs

Creating new industry clusters: Media, Retail, Call Centers and back office

processing, trickling down to organized effort of support services like officeservices, catering, transportation

Methods of Venture Financing

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

Equity: All VCFs in India provide equity but generally their contribution does not exceed49 percent of the total equity capital. Thus, the effective control and majority ownershipof the firm remains with the entrepreneur. They buy shares of an enterprise with anintention to ultimately sell them off to make capital gains.

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Conditional Loan: It is repayable in the form of a royalty after the venture is able togenerate sales. No interest is paid on such loans. In India, VCFs charge royalty rangingbetween 2 to 15 percent; actual rate depends on other factors of the venture such asgestation period, cost-flow patterns, riskiness and other factors of the enterprise.

Income Note : It is a hybrid security which combines the features of both conventionalloan and conditional loan. The entrepreneur has to pay both interest and royalty on sales,but at substantially low rates.

Other Financing Methods: A few venture capitalists, particularly in the private sector,have started introducing innovative financial securities like participating debentures,introduced by TCFC is an example.

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COMPREHENSIVE STUDY OF INDIAN MARKETVENTURE CAPITAL & ALTERNATIVE FINANCING

COMPARISON

High

Low

Low HighLevel of Risk

Figure: 2.1 venture capital & alternative financing comparison

Private Placement, IPO,

vendor financing, state

funding, strategic alliance,

parent company finance

Venture Capital

Angel investment, licensingself funding, friends, family,Community bank

Bootstrapping(factoring,trade credit, leasing ), microloans, financing debt, sellsome assets, business creditcard

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

Substitutes in Early stage

1. Angels

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

2. Private Placement

An investment bank or agent may be able to raise equity for our company byplacing our unregistered securities with accredited investors. However, you shouldbe aware that the fees and expenses associated with this practice are generallyhigher than those that come with venture and angel investors. We will likelyreceive little or no business counsel from private investors who also tend to havelittle tolerance for losses and under-performance.

3. Initial Public Offering

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

Later Stage Financing

1. Bootstrap Financing

This method is intended to develop a foundation for your business from scratch.Financial management is essential to make this work. With bootstrap financingyoure building a business from nothing, which means there is little to no marginfor error in the finance department. Keep a rigid account of all transactions anddont stray from your budget.

A few different methods of bootstrapping include :

Factoring, which generates cash flow through the sale of your accounts receivableto a factor at a discounted price forscash.

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

Leasingyour equipment instead of purchasing it outright.

2. Fund From Operations

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

3. Licensing

Sell licenses to technology that is non-essential to our company or grant limitedlicensing to essential technology that can be shared. Through outlicensing we cangenerate revenue from up-front fees, access fees, royalties or milestone payments.

4. Vendor Financing

Similar to the trade credit related to bootstrap financing, vendors can play a bigrole in financing your new business. Establish vendor relationships through ourtrade association and strike deals to offer their product and pay for it at a date inthe near future. Selling the product in time is up to us. In hopes of keeping you as acustomer, vendors may also be willing to work out an arrangement if we need tofinance equipment or supplies. Just make sure to look for stability when youresearch a vendors credentials and reputation before you sign any kind ofagreement. And keep in mind that many major suppliers (GE Small BusinessSolutions,IBM Global Financing) own financial companies that can help you.

5. Self Funding

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

6. SBIR and STTR Programs

Coordinated by the SBA, SBIR (Small Business Innovation Research) and STTR(Small business Technology Transfer) programs offer competitive federal funding

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awards to stimulate technological innovation and provide opportunities for smallbusinesses. You can learn more about these programs at SBIRworld.com.

7. State Funding

If youre not having any luck finding funding from the federal government take alook at what your state has to offer. There is a list of links to state developmentagencies that offer an array of grants and financial assistance for smallbusinessessonsAbout.com..

8. Community Banks

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

9. Microloans

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

10. Finance Debt

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

11. Friends

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

12. Family

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

13. Form a Strategic Alliance

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

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14. Sell Some Assets

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

15. Business Lines of Credit

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

16. Personal Credit Cards

Using personal credit cards to finance a business can be risky but, if you take theright approach, they can also give your business a lift. You should only considerusing this type of financing for acquiring assets and working capital. Neverconsider this to be a long-term option. Once your company breaks even or movesinto the black, ditch the credit cards and move toward traditional bank financing orlease agreements.

17. Business Credit Cards

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

GUIDELINES FOR OVERSEAS VENTURE CAPITALINVESTMENT IN INDIA

An amendment has also been carried out in the SEBI Act empowering theSecurities and Exchange Board of India (SEBI) to register and regulate VentureCapital Funds (VCFs) and Venture Capital Companies (VCCs) through specificregulations.

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

a. Offshore investment may invest in approved domestic Venture Capital

Funds/Companies set up under the new policy after obtaining FIPBapproval for the investment. An offshore venture capital company may

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contribute 100% of the capital of domestic venture capital fund, andmay also set up a domestic asset management company to manage theFund.

b. The tax exemption available to domestic VCFs and VCCs under Section10(23F) of the Income Tax Act, 1961, will also be extended to domesticVCFs and VCCs which attract overseas venture capital investmentsprovided these VCFs/VCCs conform to the guidelines applicable fordomestic VCFs/VCCs.

c. Income paid to offshore investors from Indian VCFs/VCCs will be subjectto tax as per the normal rates applicable to foreign investors.

d. Offshore investors may also invest directly in the equity of unlisted Indiancompanies without going through the route of a domestic VCF/VCC.

Hassle free entry/exit for foreign venture apital firm

SEBI registered Foreign Venture Capital Investors shall be permitted to makeinvestment on an automatic route within the overall sectorial ceiling of foreigninvestment under Annexure III of Statement of Industrial Policy without anyapproval from FIPB. Further, SEBI registered FVCIs shall be granted a generalpermission from the exchange control angle for inflow and outflow of funds andno prior approval of RBI would be required for pricing.

DTAT (Double Tax Avoidance Treaties)

Foreign funds investing in India directly into Indian portfolio companies will notbe affected by the proposed amendment. As most of these funds have been set upin tax neutral jurisdictions like Mauritius, they will continue to enjoy taxexemption on capital gains tax under the Double Tax Avoidance Agreements,effectively getting the equivalent of a pass through notwithstanding which sectorthey invest in.

Controller of Capital Issue

The exist route available to the venture capitalist were restricted to the IPO route.Pricing of the issue was dependent on Controller of Capital Issues (CCI)regulations before deregulations. Many of the issues were underpriced.Failure of OTCEOI so small companies could not hope for BSE/NSE listing.

REALXATION IN IPO NORMS :

The SEBI norms for an IPO by a Venture Capital company / fund be relaxed. Therequirement of three years track record should be waived off for a Venture Capital

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company / fund registered with SEBI. This will help the Venture Capitalcompany / fund to generate resources locally.

SEBI registered VCFs have been permitted to invest in equity and equitylinked instruments of offshore venture capital undertakings, subject to overalllimit of USD 500 million and with prior SEBI approval. Investment can bemade only in those companies which have an Indian connection and theinvestment can not exceed 10% of the VCFs investible funds.

Taxes on emerging sector :

As per Union Budget 2007 and its broad guidelines, Government proposed to limitpass-through status to venture capital funds (VCFs) making investment in nine

areas. These nine areas are biotechnology, information technology,nanotechnology, seed research and development, R&D for pharma sectors, dairyindustry, poultry industry and production of bio-fuels.

Liberalization:

The government is promoting growth in capacity utilization of available andacquired resources and hence entrepreneurship development, by liberalizing normsregarding venture capital.FACTORS AFFECTING VENTURE CAPITAL

ECONOMIC FACTORS:

1. MERGER & ACQUISITION :Venture backed liquidity events by year 2001-2008 through M&A

Quarter/Year

TotalM&ADeals

M&A DealswithDisclosedValues

TotalDisclosedM&AValue

($M)

AverageM&AsDealSize($M)

2002 318 152 7,916.4 52.12003 290 122 7,721.1 63.32004 339 186 15,440.6 83.02005-1 81 45 4,351.9 96.72005-2 81 34 4,725.0 139.02005-3 101 48 18,056.0 376.22005-4 87 39 2,594.0 66.52005 350 166 29,727.0 179.12006-1 107 52 5,607.5 107.82006-2 105 40 4,018.5 100.5

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2006-3 94 42 3,894.8 92.72006-4 62 26 5,616.8 216.02006 368 160 19,137.6 119.62007-1 82 29 4,540.3 156.6

2007-2 87 36 3,972.3 110.32007-3 100 52 10,810.0 207.92007-4 86 43 9,084.1 211.32007 355 160 28,406.7 177.52008-1 70 28 3,602.4 128.72008-2 50 14 2,397.3 171.22008 120 42 5,999.7 142.9

Table: 2.2 Venture backed liquidity eventsby year 2001-2008 through M&A

VENTURE BACKED LIQUIDITY BY EVENTS

8512.6

5999.7

169

120

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

FIRST TWO QUARTER OF

2007

FIRST TWO QUARTER OF

2008

VALUEOFDEAL

0

20

40

60

80

100

120

140

160

180

No.OFDEALS

Value of Deals No. of Deals

Figure: 2.3 Venture backed M & A deals

MERGERS AND ACQUISITIONS VOLUME DECLINES

In the second quarter of 2008, 50 venture-backed M&A deals were completed, 14of which had an aggregate deal value of $2.4 billion. M&A volume of 120transactions in the first half of 2008 was down 28 percent from the first half of2007 when 169 transactions were completed. The average disclosed deal value forthe quarter was $171.2 million. Due to this V/C is directly affected negativelybecause M&A is the exit route for Venture capital industry.

2. INFLATION RATE

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INFLATION v/s VC GROWTH RATE

7.4

4.5

3.2

5.8251.06

33.33

89.79

240.91

0

1

2

3

4

5

6

7

8

2004 2005 2006 2007

INFLATIONRA

0

50

100

150

200

250

300

VCGROWTHR

INFLATION RATE VC GROWTH RATE

Figure: 2.4 Inflation V/S Venture capital growth rateIMPACT

In above chart the inflation rate is decreased to 4.5 in 2005 from 7.4 in 2004. Atsame time the growth of VC is also declining to 33.33% in 2005 from 251.06% in2004. From the above chart we can conclude that inflation and VC has positiverelationship. Now in June 2008 the inflation rate was 11.9 and the NO. of deal infirst two quarter in 2008 was 170 and value of deal was 6390 US$mn and in thirdquarter of 2008 there was only four deals. And in October the inflation touch the

13.01%. Due to increase in inflation rate the people will going to spend more.Thus, their savings will decrease.

3. GDP GROWTH RATE

GDP V/S VC GROWTH RATE

8.57.5

9.69.4240.91

33.33

251.06

89.79

0

2

4

6

8

10

12

2004 2005 2006 2007

GDPGR

OWTHRATE(%)

0

50

100

150

200

250

300

VCGROWTHRATE(%)

GDP GROWTH RATE VC GROWTH RATE

Figure: 2.5 GDP V/S Venture capital growth rate

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IMPACT

In above chart there was a positive relation ship there was between GDP growth

rate. But in 2007 the growth of VC was decline to 89.79% from 240.91% in 2006but here the value of deal was increasing. In 2008 the growth rate is 9% andproject the next year GDP 8% to 9%. So there is a hope, the growth of VC industrycan be increased. India is the 4th largest economy in terms of PPP. GDP of India isUS$ 3787.3 billion in PPP terms.

4. CONTRIBUTION OF SECTOR IN GDP:

GDP COMPOSITION

19%

27%

54%

AGRICULTURE INDUSTRY SERVICES

Figure: 2.6 Contribution of sector in GDP

In Indian GDP growth rate the contribution of service and manufacturing sectors

are increasing. In 1991 the contribution of service and industry sectors are 41%and 27% and now in 2008 it is 54% and 27% respectively.

5. IMPRESSIVE GROWTH IN INDUSTRY SECTOR :

Items 2004-05 2005-06 2006-07 2007-08(AE)Industry 9.8 10.15 11 8.1Mining and Quarrying 7.5 4.87 5.7 4.7Manufacturing 8.7 8.98 12 8.8

Electricitym gas water supply 7.5 4.68 6 6.3Construction 14.1 16.46 12 9.8

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6. IMPRESSIVE GROWTH IN SERVICES SECTOR

Most of the venture capital industry invest their money in IT companies, hotels,

transport, communication, bio-technology, BIFS etc. This shows an impressivegrowth year by year. This are emerging sectors for venture capital industry.

7. SENSEX CRASHDOWNSENSEX IN 2008

9092.72

9788.06

12860.4314564.53

14355.75

13461.6

16415.5717287.31

15644.44

17578.72

17648.71

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

JAN

FEB

MAR

CH

APRIL

MAY

JUNE

JULY

AUG

SEPT

OCT

NOV

Figure: 2.7 SENSEX in 2008

IMPACT

The SENSEX is down by 51% from January 2008 to Nov 2008. So one companyis try to come up with IPO. IPO in first two quarter of 2007 is 43 and value of IPOis 6337.4 and in first two quarter of 2008 there is only 5 IPO and value is only

282.7 through VC Company go for exit. Because IPO is one of the exit route forVenture capitalist from the company. It is also favorable for venture capital

Items 2005-06 2006-07 2007-08(AE)Services 10.34 11.9 10.7Trade, hotels, transport &communication

11.51 11.8 12.0

Financial, real estate &business services

11.41 13.9 11.8

Community, social andpersonal services

7.21 6.9 7.3

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company because no one try to come up with IPO so they must go to the venturecapital for money

8. SMALL SCALE INDUSTRIES

No. deals V/S No. of SMEs

5671

146

299

387

109.49

113.95

118.59

123.42

128.44

0

50

100

150

200

250

300

350

400

450

2003 2004 2005 2006 2007

100

105

110

115

120

125

130

No. of deals No. of SMEs

Figure: 2.8 No. of deals V/S No. of SMEs

IMPACT

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

its investment in small and medium enterprises. A Package for Promotion of Microand Small Enterprises was announced in February 2007. This includes measuresaddressing concerns of credit, fiscal support, cluster-based development, infrastructure,technology, and marketing. Capacity building of MSME Associations and support towomen entrepreneurs are the other important features of this package. SMEs have beenallowed to manage their direct/indirect exposure to foreign exchange risk bybooking/canceling/roll over of forward contracts without prior permission of RBI.

9. INTEREST RATE :

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INTEREST RATE

6.11

7.987.23

8.739.11

0

2

4

6

8

10

MA

RCH--06

MA

RCH--07

MA

RCH--08

JUNE--

08

JULY--

08

PERCENT

Figure: 2.9 Interest Rate

IMPACT:

The interest rate increase year by year. It is 6.11% in March-2006 and now in July2008 it is 9.11%. venture capital firms generally borrow from banks now ifinterest rates are increasing interest cost of venture capital firms will also increasewhich led reduce the profitability of Venture Capital firms. Because if anyone isinvesting in any option he will look for good return, so here if they will maintaintheir own profits they will have to give less return to investors then investors will

go for other options. Here increase in bank rates affect Venture Capital firms inboth ways from the suppliers as well as buyers side.

10. CURRENCY RISK:

Exchange Rate(INR/US$)

45.75 47.7348.42 45.95 44.87 44.09 45.11

40.01

0

10

20

30

40

50

60

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

EXCHANGERA

Figure: 2.10 Exchange Rate(INR/US$)

IMPACT

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From the above chart we can see that exchange rate is highly fluctuated.Nowadays the exchange rate touches to 50 Rs. Per dollar. Now due toglobalization venture capital firms are entering at global level.

11. EXPORT AND IMPORT

VALUE OF EXPORT AND IMPORT

52.7

78.1

111.5

149.2

185.7 185.7

63.8

83.6

103.1

155.5

126.4

61.4

0

20

40

60

80

100

120

140

160

180

200

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

USdollarsinbillions

EXPORT IMPORT

Figure: 3.1 Value of export and import

IMPACT :

The value sof Import and export are increasing year by year. In 2002-03 the valueof import and export are 52.7 and 61.4 US$bn respectively and in 2007-08 thevalue of import and export are 155.7 and 185.7 US$bn. It means industry need

more money for import and export. So it is an opportunity for venture capital. On

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the other side when company going to export the company must have good contactwith other countrys company.

12. LACK OF FINANCIAL TRANSPERANCY AND OTHERPROCESSES :

Again, partly because the Indian economy was a socialistic and closedeconomy and partly because Indian entrepreneurs are not as proficient atbusiness development as their counterparts in the US, Indian start-ups lackfinancial transparency and often have limited experience in implementingeffective financial processes. This usuallymakes the taskof the Venture Capitalmuchmoredifficult not only during the due-diligence phase, but also in helpingthe start-up grow rapidly.

FACTOR FAVOURABLE

UNFAVOURABLE BOTH

MERGER&ACQUISITION,IPO

INFLATION RATE

GDP GROWTHRATE

SENSEXCRASHDOWN

SMALL SCALEINDUSTRIES

INTEREST RATE

CURRENCY RISK :

EXPORT &IMPORT

REPO RATE

Table: 3.2 Result of Economic factors

SOCIAL FACTORS:1. Demographic factor:

AGE :Population Demographic Shift

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Age % of population 1997 2002 2007Under 15 years 37.20% 33.50% 30.00%Between 15-59 years 56.10% 59.30% 62.30%Above 60 years 06.60% 06.90% 07.50%

Table: 3.3 Population Demographic Shift

AGE BETWEEN 15-59 YEARS

56.1

59.3

62.3

52

54

56

58

60

62

64

1997 2002 2007

PERCENTA

Figure: 3.4 Population demographic shift between 15-59 years

In above chart we can see young working people in India are increasing rapidly.Earlier the young working peoples are 56.1% out of total population and nowadaysit is 62.3%. Young people out of total population.

UNEMPLOYMENT RATE :

UNEMPLOYMENT RATE

8.8 8.89.5 9.2 8.9

7.87.2

0

2

4

6

8

10

2002 2003 2004 2005 2006 2007 2008

PERCENTAGE

Figure:3.5 Unemployment rate

In India the unemployment rate is very high. No doubt it is decreasing year byyear. It is 9.5% in 2004 and now it is 7.2% in 2008.

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INDIAN ENTREPRENEUR LACKS IN MARKETING, SALESAND BUSINESS DEVELOPMENT EXPERTISE :

An Indian entrepreneur is found to be quite adept technically and definitely at parwith similar entrepreneurs in developed countries. However, entrepreneurs in

India generally lacked expertise in marketing, sales and business developmentareas, especially when compared to their counterparts in the US. Furthermore,since India had socialistic economic policies during 1947-1992, there isa lack ofgood talent inmarketingandsalesprofessionals who can thrive in an extremelycompetitive environment.

INDIAN ENTREPRENEURS ARE HESISTANT TO GIVE UPCONTROL :

Indianentrepreneurs are usually hesitant about giving up control. In fact, most

of the entrepreneurs in India currently receive their initial funding from familyand friends, and even if they donot do so, the Indian socialsystem is such thatrelatives and friends still end up being a major influence. Also, company canborrow money from bank and other financial institution at lower than Venture

capital rather give substantial share to the VC.

ORIGIN OF IMMIGRANT ENTREPRENEURORIGIN OF IMMIGRANT ENTERPRENEUR

0

5

10

15

20

25

30

INDIA

UK

CHINA

TAIWA

JAPA

GERM

AN

KOREA

ISRA

EL

CANA

DA

IRAN

COUNTRY OF ORIGIN

PERCENTAGEOFFOUND

Figure. 3.6: origin of immigrant entrepreneur

Salaries of skilled people are rising 15-20% annually in India and China. Skilledimmigrants have contributed to greatly to US industrial growth but there is a hugeimmigration backlog:

Legal, Educated, skilled workers currently waiting for green cards 500,040 in main employment-based visa categories plus 555,044 family members

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Over 1 million skilled immigrants waiting for yearly quota of 120,000 visas with8,400 max/country

FACTOR FAVOURABLE UNFAVOURABLE BOTHDEMOGRAPHIC FACTOR

AGE &

UNEMPLOYMENT RATE

INDIAN ENTREPRENEURLACKSIN MARKETING,SALES AND BUSINESSDEVELOPMENTEXPERTISE

INDIANENTREPRENEURS AREHESISTANT TO GIVE UPCONTROL

ORIGIN OF IMMIGRANTENTREPRENEUR

Table: 3.7 Result of demographic factors

GEOGRAPHIC FACTOR :

1. EMERGING CITIES

TOP CITIES ATTRACTING VENTURE CPITAL INVESTMENTS(2007)

City NO. Of Deals Value(US$M)

Mumbai 109 5995Delhi (Include Noida 63 2688

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Rivalry amongcompeting

sellers

Bargainingpower of buyer

Bargainingpower ofsupplier

SubstituteProducts

& Gurgaon)Bangalore 49 685Hyderabad 41 1380Chennai 32 824

Ahmedabad 14 492Kolkata 12 339

Table: 5.6 Top cities attracting venture capital investment

Cities SectorsMumbai Software services, BPO, Media, Computer

Graphics, Animation, Finance and Banking

Bangalore All IP-led companies; IT and IT-enabledservices, BiotechnologyDelhi Software services, IT enabled services,

Telecom.Chennai IT and TelecomHyderabad IT and IT enabled services, PharmaPune Biotech, IT, BPOSource: IVCA

Table: 3.8 city wise sectorial investment by venture capital

In Venture Capital industry most of the deals are made in emerging city like Mumbai,Delhi, Bangalore, Chennai, Kolkata. In this industry Venture Capital firms invest theirmoney in most highly risk and emerging sector like bio-technology, IT-ITES, real estate,healthcare and these sectors are highly developed in this emerging city. So there is a greatopportunity for Venture Capital to invest their money in this city.

FIVE FORCE ANALYSIS:

Investor supply money company receives VC

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Threats fromnew entrants

Figure:3.9 Porters five force model

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KEY SUCCESS FACTORS FOR VENTURE CAPITAL INDUSTRYIN INDIA

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

Knowledge about Govt. changing policies:

Investment, management and exit should provide flexibility to suit the businessrequirements and should also be driven by global trends. Venture capital investmentshave typically come from high net worth individuals who have risk taking capacity. Inthis context the judgement of the judiciary raising doubts on treatment of tax oncapital gains made by firms registered in Mauritius gains significance - changing

policies with a retrospective effect is undoubtedly acting as a dampener to fresh fundraising by Venture capital firms.

Quick Response time :

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

Knowledge about Global Environment :

With increasing global integration and mobility of capital it is important that Indianventure capital firms as well as venture financed enterprises be able to have opportunitiesfor investment abroad. This would not only enhance their ability to generate betterreturns but also add to their experience and expertise to function successfully in aglobal environment.

Good Human Resource :

Venture capital should become an institutionalized industry financed and managed bysuccessful entrepreneurs, professional and sophisticated investors. Globally, venturecapitalist are not merely finance providers but are also closely involved with the investeeenterprises and provide expertise by way of management and marketing support. Thisindustry has developed its own ethos and culture.

Balance between three factors :

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

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Figure: 3.10 frame work for key success factor

Knowledge is key, to get the balance in this "Magic Triangle". With knowledge we meanknowledge about the financial markets and the industries to invest in, riskmanagement skills and contacts to investors, possible investees and externalexpertise. High profits, achievable by larger deals, are not only important for thefinancial performance of the Venture Capital company. As a good track record they arealso a vital argument to attract funds which are the basis for larger deals. However, larger

deals imply higher risks of losses.

Industrial attractiveness

Market growth rate

CAGR OF VC

1160

14234

0

2000

4000

6000

8000

10000

12000

14000

16000

2000 2007

VALUEOFDEA

43%

Figure: 4.1 CAGR of venture capital industry

41

KnowledgeRisk management skillsand contacts to investors

Possible investees andexternal expertise

Financial markets andthe industries to invest in

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From the above graph we can say that Venture capital industry is growing at the CAGRof 43%. And the value of deals in 2000 was 1160 which increased to 14234 in the year of2007. which shows substantial increase in the number of deals. This attract the newentrepreneur to enter in the industry.

Intensity of competition :

NO. OF VC FIRMS IN INDIA

81 77 78 8186 89

105

146

160

0

20

40

60

80

100

120

140

160

180

2000 2001 2002 2003 2004 2005 2006 2007 2008

YEARS

NO.OF

VCFIRMS

Figure: 4.2 Number of venture capital firms in india

Here the number of venture capital firms is increasing year by year. In 2001 it is only 77now it has been increased to 160 in the year of 2008. the reason behind that is there isover all growth in the GDP and also substantial growth position in sectorslikebiotechnology, ITes, retailing, telecom etc. due to this more players are eager toestablish their foothold in the industry.

Regulatory policy

Minimum contribution and fund size : the minimum investment in a Venture Capital Fundfrom any investor will not be less than Rs. 5 lacs and the minimum corpus of the fund

before the fund can start activities shall be at least Rs. 5 crores. And the foreign playerscan easily enter in the venture capital industry of India. An offshore venture capitalcompany may contribute 100% of the capital of domestic venture capital fund. There areother hurdles to enter in the industry so there is favorable condition for them to enter in toventure capital industry in India.

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Domestic economic factors:

GDP growth rate

GDP V/S VC GROWTH RATE

8.57.5

9.69.4240.91

33.33

251.06

89.79

0

2

4

6

8

10

12

2004 2005 2006 2007

GDPGROWTHRATE(%)

0

50

100

150

200

250

300

VCGROWTHRATE(%)

GDP GROWTH RATE VC GROWTH RATE

Figure: 4.3 GDP V/S VC Growth rate

In above chart there was a positive relation ship there was between GDP growth rate. Butin 2007 the growth of Venture Capital was decline to 89.79% from 240.91% in 2006 but

here the value of deal was increasing. In 2008 the growth rate is 9% and project the nextyear GDP 8% to 9%. So here we can conclude that there is good growth prospect for theventure capital players to enter in the horizon of India.

INFLATION v/s VC GROWTH RATE

7.4

4.5

3.2

5.8251.06

33.33

89.79

240.91

0

1

2

3

4

5

6

7

8

2004 2005 2006 2007

INFLATIONRA

0

50

100

150

200

250

300

VCGROWTHR

INFLATION RATE VC GROWTH RATE

Figure: 4.4 Inflation V/S Venture capital growth rate

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In above chart the inflation rate is decreased to 4.5 in 2005 from 7.4 in 2004. At sametime the growth of Venture Capial is also declining to 33.33% in 2005 from 251.06% in2004. From the above chart we can conclude that inflation and Venture Capital haspositive relationship. Now in June 2008 the inflation rate was 11.9 and the NO. of deal infirst two quarter in 2008 was 170 and value of deal was 6390 US$mn and in third quarter

of 2008 there was only four deals. And in October the inflation touch the 13.01%.

EXPORT AND IMPORT

VALUE OF EXPORT AND IMPORT

52.7

78.1

111.5

149.2

185.7 185.7

63.8

83.6

103.1

155.5

126.4

61.4

0

20

40

60

80

100

120140

160

180

200

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

USdollarsinbillions

EXPORT IMPORT

Figure: 4.5 value of export import

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

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CONCLUSION

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

Venture Capitalists in Indian have notice of newer avenues and regions to expand. VCshave moved beyond IT service but are cautious in exploring the right business model, forfinding opportunities that generate better returns for their investors.

In terms of impediments to expansion, few concerning factors to VCs include;unfavorable political and regulatory environment compared to other countries, difficultyin achieving successful exists and administrative delays in documentation and approval.

In spite of few non attracting factors, Indian opportunities are no doubt promising whichis evident by the large number of new entrants in past years as well in coming days.Nonetheless the market is challenging for successful investment.

Therefore Venture capitalists responses are upbeat about the attractiveness of the India asa place to do the business.

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