Professional Documents
Culture Documents
1.1
INTRODUCTION
This surge in enthusiasm for venture capital gathered pace and it has been
developing spectacularly world-wide since the second half of the seventies. Many
governments are experimenting with this US inspired investment discipline as a
means to stimulate the fledgling enterprises, which they see as vital to their
nations economic growth. The United Kingdom occupies the second place after
the US in terms of investment in venture capital. Several Organisation of
Economic Co-operation and Development (OECD) countries also have designed
and implemented measures to promote venture capitalism. The growth of venture
capital in the USA, the UK and other developing countries is primarily due to the
rapidly developing potential and commercialization of science and technology.
The emergence of unlisted securities market in these countries has further
enhanced the scope of venture capital. These opportunities lured the venture
capital institutions to invest in high-tech projects under conditions of extreme
venture
capital
investment
operations,
operated
by
foreign
multinationals. More frequently, European and Asian funds were invested in the
U.S. funds and invested in the U.S. startups. Despite these investments, non-U.S.
capital has only played a minor role in financing the U.S. venture capital.
1.2
establishment and operation of funds companies that could avail of the fiscal
benefits extended to them.
Venture Capital has been a new type of financing for the past three decades
in India, they have been contributing to the development of economy by financing
the entrepreneurial capital requirements. The researcher wishes to study the
opportunities and prospects of the venture capital companies in India, by studying,
how far they have been contributing capital to the entrepreneurs, what is the
method of project evaluation, criteria for selecting the projects, types of industries
in which they have invested, state-wise investment and performance evaluation of
the venture capital companies, for this study ICICI Venture Fund Management
Company Limited and IFCI Indian Venture Funds Limited have been taken up for
the study.
Significance of the study:
Venture capital funds have been instrumental for the most amazing success
stories in the Silicon Valley in the USA, where the concept of venture capital was
born. There have been examples of companies backed by venture capitalists
growing to large corporation abroad. Some of the notable names are Microsoft,
Federal express, Intel, SanMicrosystems etc., However in India the venture capital
companies are yet to make their presence felt. The venture capital industry in
Tamil Nadu is still at a nascent stage but with the untapped potential, is expected
to grow rapidly in the future. There is a dire need to make a swot analysis of
venture capital undertakings and identify the problems faced by them for their
development which will make Tamil Nadu a manufacturing hub. There lies the
need for the study.
1.3
REVIEW OF LITERATURE
A review of previous studies on Venture Capital Financing is essential to
understand its concept and characteristics and also to identify the areas already
investigated so that new areas hitherto unexplored may be studied in depth. A
number of articles have been written and research work have been done on the
subject both in India and abroad and these are reviewed in this section.
sectors and supporting first generation entrepreneurs, there is an acute need for
higher investments in venture capital activities. Recognizing the acute need for
higher investment in venture capital activities to promote technology and
knowledge- based enterprises, SEBI appointed a committee headed by K.B.
Chandrasekhar to identify the impediments in the growth of the venture capital
industry in India and to suggest suitable measures. The committee submitted its
report on January 8, 2000 and the Finance Minister in his budget proposals 20002001, announced a new regime for venture capital funds, and proclaimed SEBI as
the single-point nodal agency for registration and regulation of both domestic and
overseas venture capital funds. The new regime stipulated that no approval of
venture capital funds by tax authorities would be required and that the principle of
pass through would be applied in tax treatment of venture capital funds. The
recommendation of the Chandrasekhar Committee remains a land mark in this
regard.
One of the first articles in India on the subject was by Prasanna Chandra.1
In this article Prasanna Chandra states that the term Venture Capital, is used to
describe investments in very young companies or start-up situations which are
characterized by a high risk reward ratio. Prasanna Chandra also summaries the
salient features of venture capital financing.
I.M. Pandey, Venture Capital in India, Chartered Financial Analyst, JulyAugust, 1989.
3
Roger L. Cottrell6 says that there are not private sector insurance
companies or pension funds gathering regular premium income and virtually no
private banks willing to devote a small portion of their resources to the venture
capital niche. It is unlikely that such enterprises will be created in the foreseeable
future to mobilize private savings for investments.
Sanjeev Sharma7 states that anomalous and ambiguous government
guidelines seriously hamper the development of venture capital financing in India.
Guidelines according to Sharma are full of lacunae and unless they are rectified
healthy venture capital development cannot be ensured. Another deterrent to large
private participation is the risk involved in funding relatively new projects with no
proven record in market acceptability. Also the harsh and inconsistent tax policies
of the government have proved to be the industrys bane. Prof. Rupal J. Jagirdar8
feels that though Guidelines provide for a concessional rate of capital gains tax,
the move can hardly be deemed as concession in view of the enormous risks
involved in the activity.
Jagirdar estimates that in developing countries like India, the success ratio
of venture capitalism is 1:7, that is, for every one company that succeeds, seven
might fail. Typically, the supernormal profits made on a single investment should
compensate for the numerous losses spread over the other seven. For example,
Venrock Association, a premier venture capital company in the USA the financed
the start up costs of Apple computers for $ 5 million and subsequently recovered $
83 million on disinvestments to the public. However in India if one makes such
supernormal profit one has to reckon with the high rate of tax incidence which is
why some sort of preferential tax treatment is necessitated if venture capital is to
be a feasible proposition.
The author feels that in view of the current process of technological upgradation in the Indian industry and the emergence of high technology industries,
there is a considerable scope for technology related risk finance.
Institutionalisation of finance for such opportunities in the form of venture capital
9
would, therefore, go a long way in accelerating this process. The resources exist,
but the fiscal incentives to make venture capital investment a commercial risk
worth taking must be created or, if they already exist, highlighted and improved.
Basudev Dass11 attributed the reasons for slow take off of venture capital in
India to the fact that the entire Indian business ethos is corroded by black money.
Most entrepreneurs including first generation entrepreneurs are driven by income
tax, excise and wealth-tax laws into taking out large portions of a companys real
income in black. The result is that any partner in a new venture, providing the
capital, is deprived of a full and fair return.
Nitish K. Sengupta12 feels that for promoting venture capital companies, it
is necessary to provide adequate fiscal incentives and tax concessions to venture
capital companies both for raising resources from the public and for earning an
attractive return from the investment made in promoted ventures. A liberal fiscal
incentive regime conducive to the growth of venture capital industry is absolutely
necessary in order to offset the large percentage of failures and the very small
percentage of success stories which alone contribute to the ultimate overall
profitability of venture capital.
11
Pradipta Bagchi, The Rear to Venture Out, Economic Times, March 18,
1993.
14
15
venture capital system is different from that of the system developed in the US
and Europe.
26
Garry Sharp, The Insiders Guide to Raising Venture Capital, Kongan Page,
London, 1991.
28
Chris Bovaird, Introduction to Venture Capital Finance, Pitman Publishing,
London, 1990.
19
investments. The book mainly deals with a survey conducted by the author on
ninety-three venture capital backed companies in the UK to attain a better
understanding of the demands of entrepreneurs and the needs of those firms. The
book provides the reader with a knowledge and understanding of the advice and
assistance that entrepreneurial firms expect their venture capital firms to provide.
Rod B. McNaughton,29 in the book, Venture Capital International
Comparisons presents a spatially disaggregate evaluation of the organization and
functioning of the venture capital markets.
I.M. Pandey,30 in his book, Venture Capital The Indian Experience,
provides a review of the development of venture capital with focus on venture
capital in Asia. Subsequently, the next explains the context of venture capital in
India and its role in technology development. The book also examines the
practices and policies followed by the venture capital firms in India. Finally the
book reviews the policy initiatives necessary for the growth of venture capital in
India.
29
J.C. Verma, Venture Capital Financing in India, Response Books, New Delhi,
1997.
32
M.Y. Khan, Financial Services, Tata McGraw Hill Publishing Company Ltd.,
New Delhi, 1997.
33
S. Ramesh and Arun Gupta, Venture Capital and the Indian Financial Sector,
Oxford University Press, New Delhi, 1995.
21
and Markets Structure- Growth and Innovations, Indian Financial System and
Management of Financial Services deal with venture capital financing,
respectively.
The articles, Finding Exit Routes38 and Exit Policy39 answer relevant
questions regarding the exit routes of the Indian venture capital companies.
In his article Venture Capitalists Tango with SEBI,40 Sengupta and
Prasad deal with the registration formalities of Indian venture capital companies
with the SEBI. The article analyses various reasons for the registration and the
subsequent benefits available to Indian and Foreign venture capital companies
operating in India.
34
39
p.9.
40
Snigdha Sengupta and Shishir Prasad, Venture Capitalists Tango with SEBI,
Business World, 6 October, 2003, p.18.
22
The article, New Targets for Venture Funds,41 focuses on the need for
improving business models for venture capital to explore new markets in India.
41
Shishir Prasad, New Targets for Venture Funds, Business World, 3 June
2002, pp.38-40.
42
Paul Compers and Josh Lerner, Venture Capital Distributions: Short-run and
Long-run Relations, The Journal of Finance, Vol.LIII, No.6, December, 1998,
pp.2161-2183.
43
Shiv Prasad and Hanuman Prasad, Venture Capital: Its Concept and
Performance in India, Udyog Pragati, Vol.25, No.1, January-March, 2001, pp.33-41.
44
46
Satish Teneja, Venture Capital How to Source It, Abhigyan, Vol.XX, No.3,
October-December, 2002, pp.1-7.
47
48
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forms of assistance and the exists. The article also deals with the SBIs approach
to financing software activities.
The article Waiting to take-off52 presents the obstacles which restricted
the growth of venture capital industry in India.
Mishra53. in his article Venture Capital: Issues, Options and Strategies,
presents the overview of venture capital in India, stages of venture capital
financing, policy framework and various issues. Similarly, Sabarinathan54 in his
article also speaks about the vital issues relating to venture capital and IT firms in
India. The writers worth-mentioning, who elaborately discussed the legal and
operational problems in venture capital financing include: Singhvi, L.K.,55
Sadhak, H.,56 Govil Anju,57 Sudha Nagaraj,58 Hema Ramakrishnan and
Muralidhar, S.,59 and Subhash Agrawal.60
51
K.J. Taori, Venture Capital Funding, The Journal of the Indian Institute of
Bankers, Vol.72, No.2, April-June 2001, pp.13-19.
52
25
Julia Hanna (2006) stated that the venture capital firms often consider
investments in companies located far away or in unfamiliar industries. How do
they spot these opportunities and also reduce risk? It's the power of networks,
says Harvard Business School professor Toby Stuartand understanding how
they work in VC is just now starting to be understood. Key concepts include:
Networks are important in all industries, but especially so in VC where
investment opportunities can be located far away from the centers of venture
capital. "Spanning ties" enable investors with fixed locations and industry
expertise to learn of opportunities outside their geographic and industry domains,
while also reducing risk. Ties are more likely to form between VC firms in the
context of bandwagons, such as a "hot" IPO market, that create a rush of
excitement around particular types of companies.61
57
Govil Anju, Venture Capital Favour Low Risk Funds, Economic Times, July
31, Bombay, 1995.
58
apply. That's why Harvard Business School professor Joseph Lassiter is making
an unusual recommendation to his entrepreneurship students: Spend a few years
serving time in a government job. Key concepts include: MBA students and
young venture capitalists often assume that all promising start-ups can grow and
exit as fast as Internet start-ups, but they're mistaken.
A very few research works deal with venture capital financing in India. The
present study evaluates the concepts, procedures, legal and operational problems
in venture capital financing, the volume of investments made by the venture
capitalists and the perception of the investee companies of the venture capital
financing in India.
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1.4
1.5
RESEARCH METHODOLOGY
This part of the study describes the methodology which includes collection
28
Data Collection
Primary Data
The present study is an empirical one based on the survey method. The first
hand data were collected from the investee companies in India through a
questionnaire and personal observation. The data relating to various problems
encountered by the investee companies in TamilNadu and their perception of the
venture capitalists were gathered through the questionnaire.
Secondary Data
29
booklets issued and maintained by the ICICI have also been used in the study. The
information was also gathered by having informal discussions with the company
secretary and senior vice-presidents of the investee companies.
The variables to be studied were identified from the various reports and
booklets published by the financial institutions, published articles, preliminary
discussions with some selected officials of the ICICI and IFCI Venture Capital
companies. The questionnaire so drafted was circulated among a few research
scholars, and field experts for a critical review with regard to wordings, format,
sequence and the like. It was drafted in the light of their comments and a pilot
study was conducted with 15 venture capital undertakings for necessary
modifications. The questionnaire, accordingly prepared was an undisguised,
structural data-gathering instrument, suitable for a mailed questionnaire.
Period of study:
The primary data for the study was collected during 2010-2012.
1.6
SAMPLING TECHNIQUE
beneficiary units. There were 404 beneficiary units as on December 31, 2011.The
questionnaire was administered only to 150 investee companies each 75 from
30
ICICI and IFCI, Judgment Sampling Method was adopted giving due
representation to micro, small, medium and big/large industries. Thus the study
covers 150 venture capital investee undertakings.
Statistical tools applied:
The following statistical tools were applied for analyses of the study.
Percentage analysis, Mean deviation, Standard deviation, Karl Pearson Skewness,
Correlation variance, chi-square test, t-test, SWOT analysis etc.
Operational Concepts
The venture capital industry has created its own vocabulary to describe
financing methods it employs. Some of the terms and jargons commonly used in
the venture capital financing are explained below:
1. Angel
2. Bridge Financing
Financing a company expecting to go public within six to twelve months. It
includes pre-merger/acquisition finance provided to a company. It is the last round
of financing before the planned exit.
31
3. Business Plan
A detailed feasibility report of a business venture.
4. Deal Structuring
The exact terms of the investment as negotiated between the venture
capitalist and investee company. The term includes the amount, form and price of
the investment.
5. Due Diligence
Detailed analysis and appraisal of the background of the entrepreneur and
his business plan.
6. Exit
The disinvestments by a venture capital fund/ company of the equity held
in an investee company.
7. Exit Routes
The means by which a venture capitalist disinvests his stock in an assisted
company. Usual exit routes are buy-back, an IPO or trade sale.
8. Fund of Funds
A fund that invests primarily in other venture capital funds rather than
portfolio firms, often organized by an investment adviser or investment bank.
32
9. Hands-on
Management style where venture capitalists participate in day-to-day
operations of the business.
33
34
1.7
Every research study suffers from errors and limitations. Some of these are
inherent in the research design, while some others become part of the study during
various stages of operations. The present study is subject to the following
constraints and limitations.
.a. The questionnaires used for this study despite pretesting, may contain a
few errors, some variables would have been left out. But efforts have been made
to minimize such errors.
b. The investee companies categorically refused to provide any financial
data particularly relating to the amount and stages of investment. Hence, the
researcher could gather only qualitative opinion from the investee companies.
Since such financial data were not made available by the respondents, they are
excluded from the study.
1.8
CHAPTER SCHEME
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36
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