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VENTURE CAPITALVENTURE CAPITAL

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Meaning Venture capital means funds made available

for startup firms and small businesses withexceptional growth potential.

Venture capital is money provided byprofessionals who alongside management investin young, rapidly growing companies that havethe potential to develop into significant economic

contributors.

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Venture Capitalists generally:

y Finance new and rapidly growing companies

y Purchase equity securities

y Assist in the development of new products orservices

y Add value to the company through active

participation.

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Characteristics

y Long time horizon

y Lack of liquidity

y High risk

y Equity participation

y Participation in management

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Advantagesy It injects long term equity finance which provides

a solid capital base for future growth.

y The venture capitalist is a business partner,sharing both the risks and rewards. Venturecapitalists are rewarded by business success andthe capital gain.

y

The venture capitalist is able to provide practicaladvice and assistance to the company based onpast experience with other companies which werein similar situations.

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Advantages (Cont.) The venture capitalist also has a network of

contacts in many areas that can add value to thecompany.

The venture capitalist may be capable of providing additional rounds of funding should itbe required to finance growth.

Helps small and medium first generationentrepreneurs to translate their ideas into areality.

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DEVELOPMENT OFDEVELOPMENT OF

VENTURE CAPITALVENTURE CAPITALIN INDIAIN INDIA

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y

The concept of venture capital was formallyintroduced in India in 1987 by IDBI.

y The government levied a 5 per cent cess on allknow-how import payments to create the venture

fund.

y ICICI started VC activity in the same year

y Later on ICICI floated a separate VCcompany - TDICI

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Venture Capital Funds in India

VCFs in India can be categorized intofollowing five groups:

1) Those promoted by the Central Governmentcontrolled 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 financeinstitutions.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

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4) Those promoted by private sectorcompanies.For example:

- IL& FS Trust Company Ltd- Infinity Venture India Fund

5) Those established as an overseas venturecapital fund.For example:

- Walden International Investment Group

- HSBC Private Equity managementMauritius Ltd

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SOME ORGANIZATIONS

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Risk Capital & Technology Finance Corporation Ltd. (RCTFC)

y Set up in Jan 1988.

y Promoted by IFCI.

y To cater the risk capital needs of firstgeneration entrepreneurs

y Provides both risk capital and venturecapital assistance.

y In the form of conventional loans andinterest free conditional loans.

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IDBI Venture Capital Fund

y Came into effect from later half of 1987.

y Provides financial assistance to thoseindustrial concerns who adopt importedtechnology to widen domesticapplications.

y In the field of chemicals, computersoftware, electronics, food products and

medical equipments.

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Technology Development & Inf ormation

Company Of India Ltd.(TDICI)

y Established in July 1988 by ICICI and UTI under Companies Act 1986.

y Focus is on small and medium sizedunlisted companies with exceptionalgrowth.

y

In the field of IT, pharmaceutical,engineering etc.

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Indus Venture Capital Fundy Private venture capital fund.

y Provide both equity capital and

management support to entrepreneurs.y In the area of health care products,

electronics and computer technology.

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Others

y Small Industrial Development Bank Of India (SIDBI)- July 1993.

y Gujarat Venture Finance Ltd.- July1990.

y Credit Capital Venture Fund- April 1989.

y Andhra Pradesh Industrial DevelopmentCorporation.

y 20th century Venture Capital Fund.y SBI Venture Capital Fund.

y Canara Bank Venture Capital Fund

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Guidelines For VC Companies

The Govt. of India has issued the followingguidelines for various venture capital funds operating

in the country.

The financial institutions, SBI, Scheduled banks andForeign banks are eligible to establish venture capitalcompanies or funds subject to the approval from RBI.

The venture capital funds have a minimum size of Rs10 crores and a debt equity ratio of 1:1.5. If theydesire to raise funds from public, promoters willrequire to contribute minimum of 40% of the capital

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Contd« The guidelines also provide for NRI investment

up to 74% on a non-repatriable basis.

The VC funds should be independent of theparent organizations.

The VC funds will be managed by professionalsand can be set up as joint ventures with non-institutional promoters.

The VC assistance should be extended to thepromoters who are new and are professionally ortechnically qualified with inadequate resources.

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Contd« The VC funds will not be allowed to undertake

activities such as trading, broking, and moneymarket operations but they will be allowed toinvest in leasing to the extend of 15% of thetotal funds deployed.

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Venture capital industry wise

segmentation

6.94

7.73

11.5

4.32

27.95

4.82

11.43

12.92

3.36

9.03

Percentage

IT & ITES

Energy

Manufacturing

Media & Ent.

BFSI

Shipping & logistics

Eng.& Const.

Telecom

Health care

Others

Percentage calculated on the total VC investment- 14,234 USB (fig. of 2007)

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Future prospects of VC in India

y VC can help in the rehabilitation of sick units.

y VC can assist small ancillary units to upgradetheir technologies.

y VCFs can play a significant role in developingcountries in the service sector including

tourism, publishing, health care etc.

y They can provide financial assistance topeople coming out of universities, technicalinstitutes, etc thus promoting entrepreneurial

spirits.

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