Introduction

Venture capital is a growing business of recent origin in the area of industrial financing in India. The various financial institutions set-up in India to promote industries have done commendable work. However, these institutions do not come upto the benefit of risky ventures when they are undertaken by new or relatively unknown entrepreneurs. They contend to give debt finance, mostly in the form of term loan to the promoters and their functioning has been more akin to that of commercial banks. The financial institutions have devised schemes such as seed capital scheme, Risk capital Fund etc., to help new entrepreneurs. However, to evaluate the projects and extend financial assistance they follow the criteria such as safety, security, liquidity and profitability and not potentially. The capital market with its conventional financial instruments/ schemes does not come much to the benefit or risky venture. New institutions such as mutual funds, leasing and hire purchase Companys have been established as another leasing and hire purchase Companys have been established as another source of finance to industries. These institutions also do not mitigate the problems of new entrepreneurs who undertake risky and innovative ventures. India is poised for technological revolution with the emergence of new breed of entrepreneurs with required professional temperament and technical know how. To make the innovative technology of the entrepreneurs a successful business venture, support in all respects and more particularly in the form of financial assistance is all the more essential. This has necessitated the setting up of venture capital financing Division/ companies during the latter part of eighties.

Venture capital
Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk, growth start-up companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT, software, etc. The typical venture capital investment occurs after the seed funding round as growth funding round (also referred to as Series A round) in the interest of generating a return through an eventual realization event, such as an IPO or trade sale of the company. Venture capital is a subset of private equity. Therefore, all venture capital is private equity, but not all private equity is venture capital. In addition to angel investing and other seed funding options, venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company's ownership (and consequently value). Venture capital is also associated with job creation (accounting for 21% of US GDP), the knowledge economy, and used as a proxy measure of innovation within an economic sector or geography. Every year, there are nearly 2 million businesses created in the USA, and only 600800 get venture capital funding. According to the National Venture Capital Association, 11% of private sector jobs come from venture backed companies and venture backed revenue accounts for 21% of US GDP. It is also a way in which public and private actors can construct an institution that systematically creates networks for the new firms and industries, so that they can progress.

This institution helps in identifying and combining pieces of companies, like finance, technical expertise, know-hows of marketing and business models. Once integrated, these enterprises succeed by becoming nodes in the search networks for designing and building products in their domain.

Concept of venture capital

The term Venture Capital is understood in many ways. In a narrow sense, if refers to, investment in new and tried enterprises that are lacking a stable record of growth. In a broader sense, venture capital refers to the commitment of capital as shareholding, for the formulation and setting up of small firms specializing in new ideas or new technologies. It is not merely an injection of funds into a new firm, it is a simultaneous input of skill needed to set up the firm, design its marketing strategy and organize and manage it. It is an association with successive stages of firms development with distinctive types of financing appropriate to each stage of development.

Meaning of Venture Capital

Venture capital is long-term risk capital to finance high technology projects which involve risk but at the same time has strong potential for growth. Venture capitalist pool their resources including managerial abilities to assist new entrepreneur in the early years of the project. Once the project reaches the stage of profitability, they sell their equity holdings at high premium.

Definition of the Venture Capital Company

A venture capital company is defined as a financing institutions which joints an entrepreneur as a co-promoter in a project and shares the risks and rewards of the enterprise.

Scope of venture capital

Venture capital may take various forms at different stages of the project. There are four successive stages of development of a project viz. development of a project idea, implementation of the idea, commercial production and marketing and finally large scale investment to exploit the economics of scale and achieve stability. Financial institutions and banks usually start financing the project only at the second or third stage but rarely from the first stage. But venture capitalists provide finance even from the first stage of idea formulation. The various stages in the financing of venture capital are described below: Development of an Idea: In the initial stage venture capitalists provide seed capital for translating an idea into business proposition. At this stage investigation is made in-depth which normally takes a year or more. Implementation Stage Start up Finance : When the firm is set up to manufacture a product

or provide a service, start up finance is provided by the venture capitalists. The first and second stage capital is used for full scale manufacturing and further business growth. Fledging Stage Additional Finance : In the third stage, the firm has made some headway and entered the stage of manufacturing a product but faces teething problems. It may not be able to generate adequate funds and so additional round of financing is provided to develop the marketing infrastructure. Establishment Stage Establishment Finance : At this stage the firm is established in the market and expected to expand at a rapid pace. It needs further financing for expansion and diversification so that it can reap economies of scale and attain stability. At the end of the establishment stage, the firm is listed on the stock exchange and at this point the venture capitalist disinvests their shareholding through available exit routes. Before investing in small, new or young hi-tech enterprises, the venture capitalist look for percentage of key success factors of a venture capital project. They prefer project that address these problems. After assessing the viability of projects, the investors decide for what stage they should provide venture capital so that it leads to grater capital appreciation. All the above stages of finance involve varying degree of risk and venture capital industry, only after analysing such risk, invest in one or more. Hence they specialize in one or more but rarely all.

Nature of venture capital

Merchant hankers can assist venture proposals of technocrats, with high technology which are new and high risk, to seek assistance from venture capital funds for technology based industries which contribute significantly to growth process. Public issues are not available or such Greenfield ventures. Venture capital refers to organize private or institutional financing that can provide substantial amounts of capital mostly through equity purchases and occasionally through debts offerings to help growth oriented firms to develop and succeed. The term venture capital denotes institutional investors that provide equity financing to young businesses and play an active role advising their managements. Venture capital thrives best where it is not restrictively defined. Both in the U.S.A., the cradle of modern venture capital industry and U.K. where it is relatively advance venture capital as n activity has not been defined. Laying down parameters relating to size of investment, nature of technology and promoters background do not really help in promoting venture proposals. Venture capital enables entrepreneurs to actualize scientific ideals and enables inventions. It can contribute as well as benefit from securities market development. Venture capital is a

potential source for augmenting the supply of good securities with track record of performance to the stock market which faces shortage of good securities to absorb the savings of the investors. Ventura capital in turn benefits from the rise in market valuation which results from an active secondary market.

VENTURE CAPITAL IN INDIA

Venture capital funds (VCFs) are part of the primary market. There are 35 venture capital funds registered with SEBI apart from one foreign venture capital firm registered with SEBI. Data available for 14 firms indicate that total funds available with them at the end of 1996 was Rs.1402 crores, which Rs.672.85 crores had been invested in 622 projects in 1996. Ventura capital which was originally restricted to risk capital has become now private equity.

Venture capital represent funds invested in new enterprises which are risky but promise high returns. VCFs finance equity of units which propose to use new technology and are promoted by technical and professional entrepreneurs. They also provide technical, financial and managerial services and help the company to set up a track record. Once the company meets the listing requirements of OTCEI or stock exchange, VCF can disinvest its shares.

Origin
The origin of venture capital can be traced to USA in 19th century. After the second world war in 1946. the American Research and Development was formed as first venture organization which financed over 900 companies. Venture capital had been a major contributor in development of the advanced countries like UK, Japan and several European countries. In USA, the venture capital funds got a boost after the creation of Small Business Investment Company under the Small Business Investment Act in 1958. Venture Capital funds are privately owned and constitute the largest source of equity capital. There are a number of venture capital firms in Greater Boston, San Francisco, New York, Chicago and Dallas. The electronic units in these areas got a start from these firms. The ventures financed were risky but carried more than proportionate promise of high return. The venture capital funds takes a good deal of interest in the units financed by them and assist the companies with several financial, managerial and technical services. The sources of venture capital in the USA are several. Individuals make venture capital investments directly or indirectly. In direct investment individual or partnership of the individuals appraises the proposal. In the indirect approach, venture capitalist appraises the proposal and presents his evaluation to the investors.

Actually venture capitalist developers venture situations in which to invest. For his trouble, venture capitalist receive 20 to 25 percent of the ultimate profits of the partnership know as carried interest. He also collects an annual fee of 2 percent (of capital lent or invested in equity) to cover costs. Apart from individuals, investors include institutions such as pension funds, life insurance companies and even universities. The institutional investors invest about 10 percent of their portfolio in the venture proposals. Specialist venture capital funds in U.S.A., have about $30 billions on an annual basis to seek-out promising start-ups and take in them. In Japan there are about 55 active venture firms with funds amounting to $ 7 billions (1993). Venture capital funds are also extant in U.K., France and Korea.

Origins of modern private equity

Before World War II, money orders (originally known as "development capital") were primarily the domain of wealthy individuals and families. It was not until after World War II that what is considered today to be true private equity investments began to emerge marked by the founding of the first two venture capital firms in 1946: American Research and Development Corporation. (ARDC) and J.H. Whitney & Company. ARDC was founded by Georges Doriot, the "father of venture capitalism (former dean of Harvard Business School and founder of INSEAD), with Ralph Flanders and Karl Compton (former president ofMIT), to encourage private sector investments in businesses run by soldiers who were returning from World War II. ARDC's significance was primarily that it was the first institutional private equity investment firm that raised capital from sources other than wealthy families although it had several notable investment successes as well. ARDC is credited with the first trick when its 1957 investment of $70,000 in Digital Equipment Corporation (DEC) would be valued at over $355 million after the company's initial public offering in 1968 (representing a return of over 1200 times on its investment and an annualized rate of return of 101%). Former employees of ARDC went on and established several prominent venture capital firms including Greylock Partners (founded in 1965 by Charlie Waite and Bill Elfers) and Morgan, Holland Ventures, the predecessor of Flagship Ventures (founded in 1982 by James Morgan).[10] ARDC continued investing until 1971 with the retirement of Doriot. In 1972, Doriot merged ARDC with Textronafter having invested in over 150 companies. J.H. Whitney & Company was founded by John Hay Whitney and his partner Benno Schmidt. Whitney had been investing since the 1930s, founding Pioneer Pictures in 1933 and acquiring a 15% interest in Technicolor Corporation with his cousin Cornelius Vanderbilt Whitney. By far Whitney's most famous investment was in Florida Foods Corporation. The company developed an innovative method for delivering nutrition to American soldiers, which later came to be known as Minute Maid orange juice and was sold to The Coca-Cola Company in 1960. J.H. Whitney & Company continues to make investments in leveraged buyout transactions and raised $750 million for its sixth institutional private equity fund in 2005.

Importance of venture capital

There are entrepreneurs and many other people who come up with bright ideas but lack the capital for the investment. What these venture capitals do are to facilitate and enable the start up phase. When there is an owner relation between the venture capital providers and receivers, their mutual interest for returns will increase the firms motivation to increase profits. Venture capitalists have invested in similar firms and projects before and, therefore, have more knowledge and experience. This knowledge and experience are the outcomes of the experiments through the successes and failures from previous ventures, so they know what works and what does not, and how it works. Therefore, through venture capital involvement, a portfolio firm can initiate growth, identify problems, and find recipes to overcome them.

Features of Ventures Capital

Some of the features of venture capital financing are as under: Venture capital is usually in the form of an equity participation. It may also take the form of convertible debt or long term loan. Investment is made only in high risk but high growth potential projects. Venture capital is available only for commercialization of new ideas or new technologies and not for enterprises which are engaged in trading, booking, financial services, agency, liaison work or research and development. Venture capital is joins the entrepreneur as a co-promoter in projects and share the risk and rewards of the enterprise. There is continuous involvement in business after making an investment by the investor. Once the venture has reached the full potential the venture capitalist disinvests his holding either to the promoters or in the market. The basic objective of investment is not profit but capital appreciation at the time of disinvestments. Venture capital is not just injection of the money but also an input needed to set-up the firm, design its marketing strategy and organize the manage it. Investment is usually made in small and medium scale enterprises.

Confidential information
Unlike public companies, information regarding an entrepreneur's business is typically confidential and proprietary. As part of the due diligence process, most venture capitalists will require significant detail with respect to a company's business plan. Entrepreneurs must remain vigilant about sharing information with venture capitalists that are investors in their competitors. Most venture capitalists treat information confidentially, but as a matter of business practice, they do not typically enter into Non Disclosure Agreements because of the potential liability issues those agreements entail. Entrepreneurs are typically well-advised to protect truly proprietary intellectual property.

Limited partners of venture capital firms typically have access only to limited amounts of information with respect to the individual portfolio companies in which they are invested and are typically bound by confidentiality provisions in the fund's limited partnership agreement.

Disinvest Mechanism
The objective of venture capitalists to sell of the investment made by him at substantial capital gains. The disinvestments options available developed countries are : Promoters buy back. Public issue Sale to other venture capital Funds. Sale in OTC market and Management buy outs. In India, the most popular investment route is promoters buy back this permits the ownership and control of the promoter in tact. The Risk capital and Technology Finance Corporation, CAN-VCF etc. in India allow promoters to buy back equity of their enterprises. The public issue would be difficult and expensive since first generation entrepreneurs are not know in the capital market. The option involves high transaction cost and also less feasible for small ventures on account of high listing requirements of the stock exchange. The OTC Exchange in India has been set up in 1992. It is hoped that OTC1 would provide disinvestments opportunities to venture capital firms. The other investment options such as management buy out or sale to other venture capital fund and not considered appropriate in India.

Venture capitalists
A venture capitalist is a person or investment firm that makes venture investments, and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments. A venture capital fund refers to a pooled investment vehicle (often an LP or LLC) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans. Venture capital firms typically comprise small teams with technology backgrounds (scientists, researchers) or those with business training or deep industry experience. A core skill within VC is the ability to identify novel technologies that have the potential to generate high commercial returns at an early stage. By definition, VCs also take a role in managing entrepreneurial companies at an early stage, thus adding skills as well as capital, thereby differentiating VC from buy-out private equity, which typically invest in companies with proven revenue, and thereby potentially realizing much higher rates of returns. Inherent in realizing abnormally high rates of returns is the risk of losing all of one's investment in a given startup company. As a consequence, most venture capital investments are done in a pool format, where several investors combine their investments into one large fund that invests in many different startup companies. By investing in the pool format, the investors are

spreading out their risk to many different investments versus taking the chance of putting all of their money in one start up firm.

Structure
Venture capital firms are typically structured as partnerships, the general partners of which serve as the managers of the firm and will serve as investment advisors to the venture capital funds raised. Venture capital firms in the United States may also be structured as limited liability companies, in which case the firm's managers are known as managing members. Investors in venture capital funds are known as limited partners. This constituency comprises both high net worth individuals and institutions with large amounts of available capital, such as state and private pension funds, university financial endowments, foundations, insurance companies, and pooled investment vehicles, called funds of funds (FoF).

Types
Venture Capitalist firms differ in their approaches. There are multiple factors, and each firm is different. Some of the factors that influence VC decisions include:

   

Business situation: Some VCs tend to invest in new ideas, or fledgling companies. Others prefer investing in established companies that need support to go public or grow. Some invest solely in certain industries. Some prefer operating locally while others will operate nationwide or even globally. VC expectations often vary. Some may want a quicker public sale of the company or expect fast growth. The amount of help a VC provides can vary from one firm to the next.

Roles
Within the venture capital industry, the general partners and other investment professionals of the venture capital firm are often referred to as "venture capitalists" or "VCs". Typical career backgrounds vary, but, broadly speaking, venture capitalists come from either an operational or a finance background. Venture capitalists with an operational background tend to be former founders or executives of companies similar to those which the partnership finances or will have served as management consultants. Venture capitalists with finance backgrounds tend to have investment banking or other corporate finance experience. Although the titles are not entirely uniform from firm to firm, other positions at venture capital firms include:


Venture partners Venture partners are expected to source potential investment opportunities ("bring in deals") and typically are compensated only for those deals with which they are involved. Principal This is a mid-level investment professional position, and often considered a "partner-track" position. Principals will have been promoted from a senior associate position or who have commensurate experience in another field, such as investment banking, management consulting, or a market of particular interest to the strategy of the venture capital firm. Associate This is typically the most junior apprentice position within a venture capital firm. After a few successful years, an associate may move up to the "senior associate" position and potentially principal and beyond. Associates will often have worked for 12 years in another field, such as investment banking or management consulting. Entrepreneur-in-residence (EIR) EIRs are experts in a particular domain and perform due diligence on potential deals. EIRs are engaged by venture capital firms temporarily (six to 18 months) and are expected to develop and pitch startup ideas to their host firm although neither party is bound to work with each other. Some EIRs move on to executive positions within a portfolio company.

Structure of the funds

Most venture capital funds have a fixed life of 10 years, with the possibility of a few years of extensions to allow for private companies still seeking liquidity. The investing cycle for most funds is generally three to five years, after which the focus is managing and making follow-on investments in an existing portfolio. This model was pioneered by successful funds in Silicon

Valley through the 1980s to invest in technological trends broadly but only during their period of ascendance, and to cut exposure to management and marketing risks of any individual firm or its product. In such a fund, the investors have a fixed commitment to the fund that is initially unfunded and subsequently "called down" by the venture capital fund over time as the fund makes its investments. There are substantial penalties for a limited partner (or investor) that fails to participate in a capital call. It can take anywhere from a month or so to several years for venture capitalists to raise money from limited partners for their fund. At the time when all of the money has been raised, the fund is said to be closed, and the 10-year lifetime begins. Some funds have partial closes when one half (or some other amount) of the fund has been raised. "Vintage year" generally refers to the year in which the fund was closed and may serve as a means to stratify VC funds for comparison. This shows the difference between a venture capital fund management company and the venture capital funds managed by them.

Compensation
Venture capitalists are compensated through a combination of management fees and carried interest (often referred to as a "two and 20" arrangement):


Management fees an annual payment made by the investors in the fund to the fund's manager to pay for the private equity firm's investment operations In a typical venture capital fund, the general partners receive an annual management fee equal to up to 2% of the committed capital. Carried interest a share of the profits of the fund (typically 20%), paid to the private equity funds management company as a performance incentive. The remaining 80% of the profits are paid to the fund's investors Strong limited partner interest in top-tier venture firms has led to a general trend toward terms more favorable to the venture partnership, and certain groups are able to command carried interest of 2530% on their funds.

Because a fund may be run out of capital prior to the end of its life, larger venture capital firms usually have several overlapping funds at the same time; doing so lets the larger firm keep specialists in all stages of the development of firms almost constantly engaged. Smaller firms tend to thrive or fail with their initial industry contacts; by the time the fund cashes out, an entirely-new generation of technologies and people is ascending, whom the general partners may not know well, and so it is prudent to reassess and shift industries or personnel rather than attempt to simply invest more in the industry or people the partners already know.

FEATURES OF VENTURE CAPITAL

High Degrees of Risk. Venture capital represents financial investment in a highly risky project with the objective of earning a high rate of return.

Equity Participation. Venture capital financing is, invariably, an actual or potential equity participation wherein the objective of venture capitalist is to make capital gain by selling the shares once the firm becomes profitable. Long Term Investment. Venture capital financing is a long term investment. It generally takes a long period to encash the investment in securities made by the venture capitalists. Participation in Management. In addition to providing capital, venture capital funds take an active interest in the management of the assisted firms. Thus, the approach of venture capital firms is different from that of a traditional lender or banker. It is also different from that of a ordinary stock market investor who merely trades in the shares of a company without participating in their management. It has been rightly said, venture capital combines the qualities of banker, stock market investor and entrepreneur in one. Achieve Social Objectives. It is different from the development capital provided by several central and state level government bodies in that the profit objective is the motive behind the financing. But venture capital projects generate employment, and balanced regional growth indirectly due to setting up of successful new business. Investment is Liquidity. A venture capital is not subject to repayment on demand as with an overdraft or following a loan repayment schedule. The investment is realised only when the company is sold or achieves a stock market listing. It is lost when the company goes into liquidation.

Venture capital stages

As written in the previous paragraph, there are several ways to attract funding. However in general, the venture capital financing process can be distinguished into five stages; 1. 2. 3. 4. 5. The Seed stage The Start-up stage The Second stage The Third stage The Bridge/Pre-public stage

Of course the stages can be extended by as many stages as the VC-firm thinks it should be needed, which is done in practice all the time. This is done when the venture did not perform as the VC-firm expected. This is generally caused by bad management or because the market collapsed or a bit of both The next paragraphs will go into more details about each stage. The following schematics shown here are called the process data models. All activities that find place in the venture capital financing process are displayed at the left side of the model.

Each box stands for a stage of the process and each stage has a number of activities. At the right side, there are concepts. Concepts are visible products/data gathered at each activity. This diagram is according to the modeling technique founded by Professor Sjaak Brinkkemper of the University of Utrecht in the Netherlands.

The seed stage This is where the seed funding takes place. It is considered as the setup stage where a person or a venture approaches anangel investor or an investor in a VC-firm for funding for their idea/product. During this stage, the person or venture has to convince the investor why the idea/product is worthwhile. The investor will investigate into the technical and the economical feasibility (Feasibility Study) of the idea. In some cases, there is some sort of prototype of the idea/product that is not fully developed or tested. If the idea is not feasible at this stage, and the investor does not see any potential in the idea/product, the investor will not consider financing the idea. However if the idea/product is not directly feasible, but part of the idea is worth for more investigation, the investor may invest some time and money in it for further investigation. Example A Dutch venture named High 5 Business Solution V.O.F. wants to develop a portal which allows companies to order lunch. To open this portal, the venture needs some financial resources, they also need marketeers and market researchers to investigate whether there is a market for their idea. To attract these financial and non-financial resources, the executives of the venture decide to approach ABN AMRO Bank to see if the bank is interested in their idea.

After a few meetings, the executives are successful in convincing the bank to take a look in the feasibility of the idea. ABN AMRO decides to put a few experts for investigation. After two weeks time, the bank decides to invest. They come to an agreement of invest a small amount of money into the venture. The bank also decides to provide a small team of marketeers and market researchers and a supervisor. This is done to help the venture with the realization of their idea and to monitor the activities in the venture. Risk At this stage, the risk of losing the investment is tremendously high, because there are so many uncertain factors. From research, we know that the risk of losing the investment for the VC-firm is around the 66.2% and the causation of major risk by stage of development is 72%. These percentages are based on the research done by Ruhnka, J.C. and Young, J.E.

THE START-UP STAGE If the idea/product/process is qualified for further investigation and/or investment, the process will go to the second stage; this is also called the start-up stage. At this point many exciting things happen. A business plan is presented by the attendant of the venture to the VC-firm. A management team is being formed to run the venture. If the company has a board of directors, a person from the VC-firms will take seats at the board of directors. While the organisation is being set up, the idea/product gets its form. The prototype is being developed and fully tested. In some cases, clients are being attracted for initial sales. The management-team establishes a feasible production line to produce the product. The VC-firm monitors the feasibility of the product and the capability of the management-team from theBoard of directors. To prove that the assumptions of the investors are correct about the investment, the VC-firm wants to see result of market research to see whether the market size is big enough, if there are enough consumers to buy their product. They also want to create a realistic forecast of the investment needed to push the venture into the next stage. If at this stage, the VC-firm is not satisfied about the progress or result from market research, the VC-firm may stop their funding and the venture will have to search for another investor(s). When the cause relies on handling of the management in charge, they will recommend replacing (parts of) the management team. Example Now the venture has attracted an investor, the venture need to satisfy the investor for further investment. To do that, the venture needs to provide the investor a clear business plan how to realise their idea and how the venture is planning to earn back the investment that is put into the venture, of course with a lucrative return. Together with the market researchers, provided by the investor, the venture has to determine how big the market is in their region. They have to find out who are the potential clients and if the market is big enough to realise the idea.

From market research, the venture comes to know that there are enough potential clients for their portal site. But there are no providers of lunches yet. To convince these providers, the venture decided to do interviews with providers and try to convince them to join. With this knowledge, the venture can finish their business plan and determine a pretty good forecast of the revenue, the cost of developing and maintaining the site and the profit the venture will earn in the following five years. After reading the business plan and consulting the person who monitors the venture activities, the investor decides that the idea is worth for further development. Risk At this stage, the risk of losing the investment is shrinking, because the uncertainty is becoming clearer. The risk of losing the investment for the VC-firm is dropped to 53.0%, but the causation of major risk by stage of development becomes higher, which is 75.8%. This can be explained by the fact because the prototype was not fully developed and tested at the seed stage. And the VC-firm has underestimated the risk involved. Or it could be that the product and the purpose of the product have been changed during the development. THE SECOND STAGE At this stage, we presume that the idea has been transformed into a product and is being produced and sold. This is the first encounter with the rest of the market, the competitors. The venture is trying to squeeze between the rest and it tries to get some market share from the competitors. This is one of the main goals at this stage. Another important point is the cost. The venture is trying to minimize their losses in order to reach the break-even. The management-team has to handle very decisively. The VC-firm monitors the management capability of the team. This consists of how the management-team manages the development process of the product and how they react to competition. If at this stage the management-team is proven their capability of standing hold against the competition, the VC-firm will probably give a go for the next stage. However, if the management team lacks in managing the company or does not succeed in competing with the competitors, the VC-firm may suggest for restructuring of the management team and extend the stage by redoing the stage again. In case the venture is doing tremendously bad whether it is caused by the management team or from competition, the venture will cut the funding. Example The portal site needs to be developed. (If possible, the development should be taken place in house. If not, the venture needs to find a reliable designer to develop the site.) Developing the site in house is not possible; the venture does not have this knowledge in house. The venture decides to consult this with the investor. After a few meetings, the investor decides to provide the venture a small team of web-designers. The investor also has given the venture a deadline when the portal should be operational. The deadline is in 3 months.

In the meantime, the venture needs to produce a client-portfolio, who will provide their menu at the launch of the portal site. The venture also needs to come to an agreement how these providers are being promoted at the portal site and against what price. After 3 months, the investor requests the status of development. Unfortunately for the venture, the development did not go as planned. The venture did not make the deadline. According to the one who is monitoring the activities, this is caused by the lack of decisiveness by the venture and the lack of skills of the designers. The investor decides to cut back their financial investment after a long meeting. The venture is given another 3 months to come up with an operational portal site. Three designers are being replaced by a new designer and a consultant is attracted to support the executives decisions. If the venture does not make this deadline in time, they have to find another investor. Luckily for the venture, with the come of the new designer and the consultant, the venture succeeds in making the deadline. They even have 2 weeks left before the second deadline ends. Risk At this stage, the risk of losing the investment still drops, because the venture is capable to estimate the risk. The risk of losing the investment for the VC-firm drops from 53.0% to 33.7%, and the causation of major risk by stage of development also drops at this stage, from 75.8% to 53.0%. This can be explained by the fact that there is not much developing going on at this stage. The venture is concentrated in promoting and selling the product. That is why the risk decreases. THE THIRD STAGE This stage is seen as the expansion/maturity phase of the previous stage. The venture tries to expand the market share they gained in the previous stage. This can be done by selling more amount of the product and having a good marketing campaign. Also, the venture will have to see whether it is possible to cut down their production cost or restructure the internal process. This can become more visible by doing a SWOT analysis. It is used to figure out the strength, weakness, opportunity and the threat the venture is facing and how to deal with it. Except that the venture is expanding, the venture also starts to investigate follow-up products and services. In some cases, the venture also investigates how to expand the life-cycle of the existing product/service. At this stage the VC-firm monitors the objectives already mentioned in the second stage and also the new objective mentioned at this stage. The VC-firm will evaluate if the managementteam has made the expected reduction cost. They also want to know how the venture competes against the competitors. The new developed follow-up product will be evaluated to see if there is any potential. Example

Finally the portal site is operational. The portal is getting more orders from the working class every day. To keep this going, the venture needs to promote their portal site. The venture decides to advertise by distributing flyers at each office in their region to attract new clients. In the meanwhile, a small team is being assembled for sales, which will be responsible for getting new lunchrooms/bakeries, any eating-places in other cities/region to join the portal site. This way the venture also works on expanding their market. Because of the delay at the previous stage, the venture did not fulfil the expected target. From a new forecast, requested by the investor, the venture expects to fulfil the target in the next quarter or the next half year. This is caused by external issues the venture does not have control of it. The venture has already suggested to stabilise the existing market the venture already owns and to decrease the promotion by 20% of what the venture is spending at the moment. This is approved by the investor. Risk At this stage, the risk of losing the investment for the VC-firm drops with 13.6% to 20.1%, and the causation of major risk by stage of development drops almost by half from 53.0% to 37.0%. However at this stage it happens often that new follow-up products are being developed. The risk of losing the investment is still decreasing. This may because the venture rely its income on the existing product. That is why the percentage continuous drop. The Bridge/Pre-public stage

In general this stage is the last stage of the venture capital financing process. The main goal of this stage is to achieve an exit vehicle for the investors and for the venture to go public. At this stage the venture achieves a certain amount of the market share. This gives the venture some opportunities like for example:
   

Hostile take over Merger with other companies; Keeping away new competitors from approaching the market; Eliminate competitors.

Internally, the venture has to reposition the product and see where the product is positioned and if it is possible to attract newMarket segmentation. This is also the phase to introduce the follow-up product/services to attract new clients and markets. As we already mentioned, this is the final stage of the process. But most of the time, there will be an additional continuation stage involved between the third stage and the Bridge/prepublic stage. However there are limited circumstances known where investors made a very successful initial market impact might be able to move from the third stage directly to the exit stage. Most of the time the venture fails to achieves some of the important benchmarks the VC-firms aimed. Example

Now the site is running smoothly, the venture is thinking about taking over the competitors website happen.nl. The site is promoting restaurants and is also doing business in online ordering food. This proposal is being protested by the investor, because it may cost a lot of the ventures capital. The investor suggests a merge instead. To settle down their differences, the venture requested an external party to investigate into the case. The result of the investigation was a take-over. After reading the investigation, the investor agrees to it and happen.nl is being taken over by the venture. With the take-over of a competitor, the venture has expanded its services. Seeing the ventures result, the investor comes to the conclusion that the venture still have not reach the target that was expected, but seeing how the business is progressing, the investor decides to extend its investment for another year. Risk At this final stage, the risk of losing the investment still exists. However, compared with the numbers mentioned at the seed-stage it is far lower. The risk of losing the investment the final stage is a little higher at 20.9%. This is caused by the number of times the VC-firms may want to expand the financing cycle, not to mention that the VC-firm is faced with the dilemma of whether to continuously invest or not. The causation of major risk by this stage of development is 33%. This is caused by the follow-up product that is introduced.

Venture Capital Valuation Method

A core compenent of the venture capital investment process is the valuation of the business seeking outside investment. There following is a basic outline of commonly used valuation methods for early stage companies. Traditional Valuation Methods Net Present Value Method. The net present value (NPV) or net present worth (NPW) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows. In the case when all future cash flows are incoming (i.e. principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting, and widely throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met. The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputs a price; the converse process in DCF analysis taking a sequence of cash flows and a price as input and inferring as output a discount rate (the discount rate which would yield the given price as NPV) is called the yield, and is more widely used in bond trading.

Comparables. Similar to real estate valuations, the value of a company can be estimated through comparisons with similar companies. There are many factors to consider in selecting comparable companies such as size, growth rate, risk profile, capital structure, etc. Hence great caution must be exercised when using this method to avoid an apples and oranges comparison. Another important consideration is that it may be difficult to get data for comparable companies unless the comparable is a public company. Another caveat when comparing a public company with a private company is that, all other things being equal, the public company is likely to enjoy a higher valuation because of its greater liquidity due to being publicly traded. The Venture Capital Valuation method in contrast often involves investments in an early stage company that are showing great promise, but typically cannot be assessed through traditional valuation methods, as these companies do not have a long track record and its earnings prospects are volatile and /or uncertain. The initial years following the venture capital investment often will involve projected losses. The venture capital method of valuation recognizes these realities and focuses on the projected value of the company at the planned exit date of the investor. The steps involved in a typical valuation analysis involving the venture capital method follow. Step 1: Estimate the Terminal Value The terminal value of the company is estimated at a specified future point in time. That future point in time is the planned exit date of the venture capital investor, typically 4-7 years after the investment is made in the company. The terminal value is normally estimated by using a multiple such as a price-earnings ratio applied to the projected net income of the company in the projected exit year. Step 2: Discount the Terminal Value to Present Value In the net present value method, the firms weighted average cost of capital (WACC) is used to calculate the net present value of annual cash flows and the terminal value. In the venture capital method, the venture capital investor uses the target rate of return to calculate the present value of the projected terminal value. The target rate of return is typically very high (30-70%) in relation to conventional financing alternatives. Step 3: Calculate the Required Ownership Percentage The required ownership percentage to meet the target rate of return is the amount to be invested by the venture capitalist divided by the present value of the terminal value of the company. In this example, $5 million is being invested. Dividing by the $17.5 million present value of the terminal value yields a required ownership percentage of 28.5%. The venture capital investment can be translated into a price per share as follows: The company currently has 500,000 shares outstanding, which are owned by the current owners.

If the venture capitalist will own 28.5% of the shares after the investment (i.e. 71.5% owned by the existing owners), the total number of shares outstanding after the investment will be 500,000/0.715 = 700,000 shares. Therefore the venture capitalist will own 200,000 of the 700,000 shares. Since the venture capitalist is investing $5.0 million to acquire 200,000 shares the price per share is $5.0/200,000 or $25 per share. Under these assumptions the pre-investment or pre-money valuation is 500,000 shares x $25 per share or $12.5 million and the post-investment or post-money valuation is 700,000 shares x $25 per share or $17.5 million. Step 4: Calculate Required Current Ownership % Given Expected Dilution due to Future Share Issues The calculation in Step 3 assumes that no additional shares will be issued to other parties before the exit of venture capitalist. Many venture companies experience multiple rounds of financing and shares are also often issued to key managers as a means of building an effective, motivated management team. The venture capitalist will often factor future share issues into the investment analysis. Given a projected terminal value at exit and the target rate of return, the venture capitalist must increase the ownership percentage going into the deal in order to compensate for the expected dilution of equity in the future. The required current ownership percentage given expected dilution is calculated as follows: Required Current Ownership = Required Final Ownership divided by the Retention Ratio

THE INDIAN SCENARIO Methods of Venture Financing

Venture capital is available in four forms in India : 1. Equity Participation 2. Conventional Loan 3. Conditional Loan 1.Equity Participation: Venture Capital firms participate in equity through direct purchase of shares but their stake does not exceed 49% .These shares are retained by them till the assisted projects making profit. These shares are sole either to the promoter at negotiated price under by back agreement or the public in the secondary market at a profit. 2. Conventional Loan: Under this form of assistance, a lower fixed rate of interest is charged till the assisted units become commercially operational, after which the loan carries normal or

higher rate of interest. The loan has to be repaid according to a predetermined schedule of repayment as per terms of loan agreement. 3. Conditional Loan : Under this form of finance, an interest free loan is provided during the implementation period but it has to pay royalty on sales. The loan has to be repaid according to the a pre determined schedule as soon as the company is able to generate sales and income' At present several venture capital firms are incorporated in India and they are promoted either by all India Financial Institutions like IDBI, ICICI, IFCL, State level financial institutions like Indus venture capital fund. The present venture capital players can be broadly classified into the following four categories. 1. Companies Promoted by all India FIs: Venture capital Division of IDBI Risk Capital and technology Finance corporation Ltd., (RCTC)(Subsidiary of IFCI) Technology Development and information Company of India Ltd.(TDICI ),(Promoted by ICICI & UTD) 2.Companies Promoted by State FIs: Gujarat Venture Finance Ltd. (promoted by GUC) Andhra Pradesh Industrial Development Corporation Venture Capital Ltd. (Promoted by APIDC) 3. Companies Promoted by Banks: Can bank venture capital Fund (Promoted by Canfina and Canara Bank)SBI Venture Capital Fund (promoted by SBI caps )Indian Investment Fund (promoted by Grind lays Bank)Infrastructure Leasing (promoted by Central Bank of India ) 4. Companies in Private Sector : Indus Venture Capital Fund (Promoted by Mafatlal and Hindustan Lever )Credit Capital Venture Fund (India) Ltd., 20th century Venture Capital Corporation Ltd., Venture Capital Fund promoted by V.B. Desai & Co.A brief account of major ingredients of Indian venture capital industry is presents here.

Causes for slow growth of venture capital

Reinventing communications. Venture investors poured tons of cash into media and entertainment over the last half-decade. But they did so in a perversely risk-averse way: they made investments dependent on 20th century advertising and communications, instead of investments focused on reinventing it. Any teenager could have told you five years ago that trying to cram the mediascape full of even more ads was an idea even worse than the CueCat - and today, consumers are turning off and tuning out communications from firms like never before.

Reconceiving capital markets. Here's one of the most common complaints you'll hear from a venture investor: the big banks aren't interested in taking startups public anymore, and the IPO window's closed. A clear signal that the capital markets are broken is being broadcast and instead of seeing a crystal-clear opportunity for reinvention, venture capitalists see an immovable barrier? Feel the lame yet? With revolutionaries like that, who needs beancounters? Business models for public goods. Here's the paradox of the digital economy: digital goods are also public goods. So how do we capture value from them? It's a tough problem - but most venture funds haven't even tried most of the emerging solutions (here are some: turn goods into services, amplify scarcity, and democratize pricing). What does it say whena band - Radiohead - is better able to break new ground in developing business models for public goods than venture investors? Business models for radical responsibility. Over the last decade, it's become increasingly clear that the radical irresponsibility of industrial-era business is deeply unsustainable. That irresponsibility must become radical responsibility. Yet, the trailblazers of making radical responsibility economically viable are non-profits and social businesses - not venture funds, who have been deeply reluctant to explore the economic possibilities of responsibly powered business models. Discovering new sources of advantage. Most venture capitalists accept the orthodoxy that sources of advantage are fixed - and that's the single biggest mistake they make. Advantage isn't fixed and permanent. New industries and markets are powered by new sources of advantage - which create economic growth. When the IT industry was born, owning the standard became a critical source of advantage. When biotech was born, experimentation sprang to life. We've never needed new sources of advantage more than we do today. The industries and markets of the 21st century cannot be powered by yesterday's sources of advantage. Brands are losing relevance; cost advantage is often an illusion; differentiation is too often simply skin-deep; and market dominance stifles innovation and creativity - to name just a few. Yet, tomorrow's sources of advantage remain largely unexplored - because venture investors have been systematically underinvesting in discovering them.

Suggestions for the growth of venture capital Funds

Venture capital industry is at the take off stage in India. It can play a catalytic role in the development of entrepreneurship skill that remains unexploited among the young and

energetic technocrats and other professionally qualified talents. It can help promote new technology and hi-tech industries, which involve high risk but promises attractive rate of return. In order to ensure success of venture capital in India, the following suggestions are offered: (i) Exemption/Concession for Capital Gains: Capital gains law represents a hurdle to the success of venture capital financing. The earnings of the funds depend primarily on the appreciation in stock values. Further, the capital gains may arise only after 3 to 4 years, of investment and that the projects, being in new risky areas, may not even succeed. Capital gains by corporate bodies in India are taxed at a much investment risk and long gestation period this is a deterrent to the development of VCFs. The benefit of the capital gains, under section 48 of the Act is not significant. Hence, it would be advisable that all long term capital gains earned by VCCs should be exempted from tax or subject to concessional flat rate. Further, capital gains reinvested in new venture should also be exempted from tax. Section 52(E) of the Act should be amended to give effect to this. (ii) Development of Stock Markets: Guidelines issued by finance ministry provides for the sale of investment by way of public issue at the price to be decided on the basis of book value and earning capacity. However, this method may not give the best available prices to venture fund as it will not be able to consider future growth potential of the invested company. One of the major factors which contributed to the success of venture funds in the West is development of secondary and tertiary stock markets. These markets do not have listing requirements and are spread over all important cities and towns in the country. These stock markets provide excellent disinvestments mechanism for venture funds. In India, however, stock market is not developed beyond a few important cities. Success of venture capital fund depends very much upon profitable disinvestments of the capital contributed by it. In US and UK secondary and tertiary markets helped in accomplishing the above. However, in India, promotion of such maker is not feasible in the prevailing circumstances as such laissez faire policy may attack persons with ulterior motives in the business to the determent of general public. However, stock market operation may be started at man by more big cities where, say, the number of stock exchanges can be increased to 50. Further, permission to transact in unlisted securities with suitable regulation will ensure firsthand contact between venture fund and investors.

(iii) Fiscal Incentives: Fiscal incentives may be given in the form of lowering the rate of income tax. It can be accomplished by : (i) Application of provisions applicable to non-corporate entities for taxing long term capital gains. (ii) An allowance to funds similar to section 80-CC of Income Tax Act, say 20 percent of the investment in new venture which can be allowed as deduction from the income. (iv) Private Sector Participation In US and UK where the economy is dominated by private sector, development of venture fund market was possible due to very significant role played by private sector which is often willing to put money in high risk business provided higher returns are expected. The guidelines by finance ministry provide that non- institutional promoters share in the capital of venture fund cannot exceed 20 percent of total capital; further they cannot be the single largest equity holders. The private sector, because of this provision, may not like to promote venture fund business. Promotion of venture funds by private sector, in addition to public financial institution and banks, is recommended as: Private sector is in advantageous position as compared to financial institutions and banks to provide managerial support to new ventures as leading industrial house have a pool of experienced professional managers in all fields of management viz. marketing, production and finance. The leading business houses will be able to raise funds from the investing public with relative ease. (v) Review the Existing Laws Todays need is to review the constrains under various laws of the country and resolve the issue that could come in the way of growth of the innovative mode of financing. Suitable exemption should be given from Section 43 A of the companies Act to venture capital finance companies so that they are not required to comply with several provisions of the Act applicable to public limited companies. Amendment of Section 77 of the Companies Act is required to enable the new venture capital companies to buy back their shares at the time of disinvestments by VC Finance Companies. Ceiling on interoperate loans and investment as specified in Section 370 and 372 of the companies Act should be relaxed in case of VC Finance Companies and Venture Capital

Companies to enable them to invest suitable in newly promoted companies. The only investment available to the VC Finance company for investment is equity shares. This restriction should be relaxed so that VC Finance Company can finance through preferential issues and conditional loans. The scope of VC should not only be confirmed to start up finance but also be broadened to development finance, expansion and growth, buyouts, mergers and amalgamation. The restriction on investment of 80% of the entire funds within a period of 3 years should be removed. (vi) Limited Partnership The Practice of the limited partnership as in vogue in UK should be permitted in order to promote integration of object between the managers and contributors for the success of venture capital projects. (vii) Public Issue through OTCEI The suggestion of Malagam Committee regarding making the public issue through OTCEI should be implemented in case of certain specified industries. The initiative on the part of the Government in the direction would see rapid growth of a new breed of venture capital assisted entrepreneurs.

Examples of venture capital companies in India

1. IDBI Venture Capital Fund The initial impetus was given by IDBI's Technology Division when venture capital fund was set up in 1986 for encouraging commercial application of indigenously developed technology and adopting imported technology for wider domestic application. The salient features of the scheme are : 1. Financial assistance under the scheme is available to projects whose requirements range between Rs.5 lakhs and 2.5 crores. The promoters stake should be at least 10% for the venture below Rs. 50 lakhs and 15% for those above Rs. 50 lakhs. 2. Assistance was extended in the form of unsecured loan involving minimum legal formalities. Interest at a confessional rate of 9% is charged during technology development and trial production and 17$ once the product is introduced in the market. 3. The fund extend financial assistance to venture such as chemicals. computer software, electronics. bio-technology, non-conventional energy/food processing, medical equipment etc.

4. The project does not succeed ,IDBI,, can insist on transfer of technology to some other promoter designated by it on mutually agreed terms and conditions. It has assisted 70 projects with a net sanction of Rs.46.80 crores upto March,1993. 2. The Risk capital and Technology FinanceCorporation The Risk Capital and Technology Finance corporation Ltd., (RCTC) the subsidiary of IFCI provided venture capital through technology - finance and development scheme to meet the specific needs of such technology development. The RCTC , apart from providing assistance in the form of risk capital, is expected to finance high tech projects in the form of venture capital for technology up gradation and development. The assistance is provided in the form of short term conventional loan or interest free conditional loans allowing profit and risk sharing with the project sponsors or equity participation. Through its Technology Finance Development Scheme, it has assisted 23 project committing funds of the order of Rs.13 crores and under venture cap[ital fund scheme, it has assisted 17 projects with a sanction of Rs. 16 crores as on 31st March 1993.

3. Technology Development and Information Company of India Limited (TDIC 1998). The venture capital fund was jointly created by Industrial Credit and Investment Corporation of India (ICICI) and Unit Trust of India (UTI) to finance projects of professional technocrats in the small and medium size industries who take initiative in designing and developing indigenous technology in the country. TDICs first venture capital fund of Rs.20 crores was subscribed equally by ICICI and UTI under the new Venture Capital Unit Scheme I of UTI. Under the scheme TDICI sanctioned financial support of Rs.20 croes to 40 projects which include computer hardware, computer integrated manufacturing system, tissue culture, chemicals, food and feed technology, environmental engineering etc. The TDICs second venture Fund of Rs. 100 croes has been contributed by UTI, ICICI, other financial institutions, banks, corporate sector etc. By March 31, 1993, TDICI has disbursed Rs. 25.81 crores to 42 companies under scheme I and Rs. 79.29 croes to 79 companies under scheme II in a variety of industries such as computer, electronics, biotechnology, medical, non-conventional energy etc. Many of these projects are set-up by first generation entrepreneurs. TDICI invests in companies with attractive growth and earnings potential with a view to achieving long terms capital gain. TDICIO involves in seed, start-up and growth stage companies in a wide spectrum of industrial sub-sectors. The Scheme seeks to assist technocrats involve in developing commercially viable technologies or products, implementing indigenously developed yet untested technologies on

commercial scale, and adapting innovative technologies for domestic applications. The assistance per project may be up to Rs.2 crore in the form of equity and/or conditional loan (with flexible interest rates and repayment period). The equity in the project would be held for a period of 5-8 years and thereafter sold to the promoter (at a mutually price) or disposed in the secondary market. During the development phase, the conditional loan would carry no interest; during the postdevelopment phase the interest rate on it would depend on the commercial viability of the project. 4. Gujarat Venture Finance Ltd (GUFL) The Gujarat Industrial Investment Corporation promoted Gujarat Venture Finance Ltd., the first stage level venture finance company to begin venture finance activities since 1990. It provides financial support to the ventures whose requirements range between 25 lakhs and 2 crores. GUFL provides finance through equity participation and quasi equity instruments. The firm engaged in bio-technology, surgical instruments conservation of energy and good processing industries are covered by GUFL. Total corporation of Rs.24 crores of the fund was co-financed by GIIC, IDBI, state level fianc corporation, some private corporate and the World Bank. 5. Andhra Pradesh Industrial Development Corporations Venture Capital Ltd. (APIDCVCL). The APIDL-VCL was launched in June 1990 with a fund of Rs.13.5 crores of which Rs.4.5 crore was contributed by the World Bank, Rs.3 crores by IDBI and Rs.1.5 crore was committed by Andhra Bank. APIDC-VCL has a few proposal for venture capital financing in the sphere of biotechnology and computer software applications. Assistance toe ach venture is in the range of Rs/25 lakhs to Rs.1 crores and does not exceed 49 percent of the total equity of a project. Assistance is normally in the form of equity but depending on the circumstances loans may also be provided. 6.Canara Bank Canara Bank has set up a venture capital fund called canbank venture capital fund worth Rs.10 crore. It has sanctioned Rs.10 crore to 33 projects on March 1992 in the diverse fields like chemicals, machines, food stuff etc. 7.State Bank of India Capital Markets Ltd. (SBAICAP) The State Bank of Indias subsidiary SBI Capital Markets Ltd., extend venture capital assistance to technical entrepreneurs who have good technique ability but lack financial

strength. The support is by way of either direct subscription or by way of underwriting support to the company. In any case direct participation will not be in excess of 49% of the total paid up capital of the assisted unit. The projects in high priority, thrust areas such as import substitute, high export potential, hi-tech options are preferred. The equity holdings of assisted companies are generally disinvested in a period of three years either by way of sale to public, sale in the OTC exchange of India, sale by private realty or by buy back arrangements with promotes or their nominees. SBICAP as on September 30, 1992 assisted 17 companies with investment of Rs.812 lakhs. 8.Indus Venture Capital Fund Indus venture capital fund is one of the noteworthy private sector venture companies. It has been promoted with a starting corpus of Rs.21 crores contributed by several Indian and international institutions and companies. Indus venture Management Limited has been entrusted to manage the fund of Indus venture capital fund. It provides equity and management support to the firms. Financial assistance is given to those firms who confine their commercial operations in areas of health care products, electronics and computer technology. Investment strategy of the equity funds is not to invest more that 10% of its corpus in one project and equity stake in a company may be upto 50%. The basic objective is to earn capital gains through equity liquidation after certain reasonable time span. The leading leasing company, 20th Century Finance Corporation has launched venture capital fund worth Rs.20 crores to cater to the needs of small businessman. 9.Credit Capital Venture Fund Limited The first private sector venture capital fund called, Credit Capital Venture Fund (CVF) was set up by Credit Capital Corporation Limited (CVF) in April 1989 with an authorized capital of Rs.10 lakhs. Rs.6.5 crore was subscribed by International financial agencies. The CVF went to public in January 1990 to raise Rs.3.5 crore. It provides entrepreneurs who have ideas and ability, but no finance, with equity capital for new green fields projects., It main thrust area would be export oriented industries and technology oriented projects, the presents portfolio of the fund consists of investment in six units worth Rs.25 lakhs. CVF launched a new venture fund of Rs.10 crore called The Information Technology Fund to provide direct equity support to projects in the technology information field . Present Position The were 20 venture capital companies in India both in private and public sector in 1994. These companies assisted 350 projects to the tune of Rs.250 crore upto 1993-94 the form of assistance in these projects are follows : Equity 62% Convertible debentures 14% Debt. 24%

Out of the 350 projects assisted 62% belongs to new entrepreneurs. At the end of 1996, according to the Venture Capital Association of India, 14 of its members had set up 17 funds. They had access to Rs. 1402 crore. A major part of the deployment has been in equities- around 61 per cent of the total investment of Rs. 673 crore. Another 21 per cent was deployed in convertible instruments at 6 per cent in debt. The fast growing software sector has not found favour with venture capital companies. Industrial products and machinery accounted for 29 per cent of the total venture capital investment followed by 13 per cent of the total in consumer related industries, 8 per cent in food processing and only 7 per cent in software and service sector.

Main alternatives to venture capital

Because of the strict requirements venture capitalists have for potential investments, many entrepreneurs seek seed funding from angel investors, who may be more willing to invest in highly speculative opportunities, or may have a prior relationship with the entrepreneur. Furthermore, many venture capital firms will only seriously evaluate an investment in a startup company otherwise unknown to them if the company can prove at least some of its claims about the technology and/or market potential for its product or services. To achieve this, or even just to avoid the dilutive effects of receiving funding before such claims are proven, many start-ups seek to self-finance sweat equity until they reach a point where they can credibly approach outside capital providers such as venture capitalists or angel investors. This practice is called "bootstrapping". There has been some debate since the dot com boom that a "funding gap" has developed between the friends and family investments typically in the $0 to $250,000 range and the amounts that most VC funds prefer to invest between $1 million to $2 million. This funding gap may be accentuated by the fact that some successful VC funds have been drawn to raise ever-larger funds, requiring them to search for correspondingly larger investment opportunities. This gap is often filled by sweat equity and seed funding via angel investors as well as equity investment companies who specialize in investments in startup companies from the range of $250,000 to $1 million. The National Venture Capital Association estimates that the latter now invest more than $30 billion a year in the USA in contrast to the $20 billion a year invested by organized venture capital funds. Crowd funding is emerging as an alternative to traditional venture capital. Crowd funding is an approach to raising the capital required for a new project or enterprise by appealing to large numbers of ordinary people for small donations. While such an approach has long precedents in the sphere of charity, it is receiving renewed attention from entrepreneurs such as independent film makers, now that social media and online communities make it possible to reach out to a group of potentially interested supporters at very low cost. Some crowd funding models are also being applied for startup funding, for example, Grow VC. One of the reason to look for alternatives to venture capital is the problem of the traditional VC model. The traditional VCs are shifting their focus to later-stage investments, and return on investment of many VC funds have been low or negative. In industries where assets can be securitized effectively because they reliably generate future revenue streams or have a good potential for resale in case of foreclosure, businesses may more cheaply be able to raise debt to finance their growth. Good examples would include asset-intensive extractive industries such as mining, or manufacturing industries. Offshore

funding is provided via specialist venture capital trusts, which seek to utilise securitization in structuring hybrid multi-market transactions via an SPV (special purpose vehicle): a corporate entity that is designed solely for the purpose of the financing. In addition to traditional venture capital and angel networks, groups have emerged, which allow groups of small investors or entrepreneurs themselves to compete in a privatized business plan competition where the group itself serves as the investor through a democratic process. Law firms are also increasingly acting as an intermediary between clients seeking venture capital and the firms providing it.