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Alfred Rodrigues (11)
PGPM - 2016
Introduction
• The venture capital investment helps for the growth of innovative entrepreneurships in India.
• Venture capital has developed as a result of the need to provide non-conventional, risky finance to new
ventures based on innovative entrepreneurship.
• Venture capital is an investment in the form of equity, quasi-equity and sometimes debt - straight or
conditional, made in new or untried concepts, promoted by a technically or professionally qualified
entrepreneur.
• Venture capital means risk capital. It refers to capital investment, both equity and debt, which carries
substantial risk and uncertainties. The risk envisaged may be very high may be so high as to result in total
loss or very less so as to result in high gains
The concept of Venture
Capital
Venture capital means many things to many people. It is in fact nearly impossible to come across one single
definition of the concept.
• Jane Koloski Morris, editor of the well known industry publication, Venture Economics, defines venture
capital as 'providing seed, start-up and first stage financing' and also 'funding the expansion of companies
that have already demonstrated their business potential but do not yet have access to the public securities
market or to credit oriented institutional funding sources.
• The European Venture Capital Association describes it as risk finance for entrepreneurial growth oriented
companies. It is investment for the medium or long term return seeking to maximize medium or long term
for both parties. It is a partnership with the entrepreneur in which the investor can add value to the
company because of his knowledge, experience and contact base.
The Origin of Venture Capital
• In the 1920's & 30's, the wealthy families and individuals investors provided the start up money for companies that
would later become famous.
• Eastern Airlines and Xerox are the more famous ventures they financed.
• Among the early VC funds set up was the one by the Rockfeller Family which started a special fund called VENROCK
in 1950, to finance new technology companies.
• General Doriot, a professor at Harvard Business School, in 1946 set up the American Research and Development
Corporation (ARD), the first firm, as opposed to a private individuals, at MIT to finance the commercial promotion
of advanced technology developed in the US Universities. ARD's approach was a classic VC in the sense that it used
only equity, invested for long term, and was prepared to live with losers. ARD's investment in Digital Equipment
Corporation (DEC) in 1957 was a watershed in the history of VC financing.
• While in its early years vc may have been associated with high technology, over the years the concept has
undergone a change and as it stands today it implies pooled investment in unlisted companies.
Venture Capital in India
• In India the Venture Capital plays a vital role in the development and growth of innovative entrepreneurships.
• Venture Capital activity in the past was possibly done by the developmental financial institutions like IDBI, ICICI and State
Financial Corporations. These institutions promoted entities in the private sector with debt as an instrument of funding.
• For a long time funds raised from public were used as a source of Venture Capital. This source however depended a lot on
the market vagaries.
• In India, the need for Venture Capital was recognized in the 7th five year plan and long term fiscal policy of GOI. In 1973 a
committee on Development of small and medium enterprises highlighted the need to faster VC as a source of funding new
entrepreneurs and technology.
• VC financing really started in India in 1988 with the formation of Technology Development and Information Company of
India Ltd. (TDICI) - promoted by ICICI and UTI.
• The first private VC fund was sponsored by Credit Capital Finance Corporation (CFC) and promoted by Bank of India, Asian
Development Bank and the Commonwealth Development Corporation viz. Credit Capital Venture Fund.
• At the same time Gujarat Venture Finance Ltd. and APIDC Venture Capital Ltd. were started by state level financial
institutions. Sources of these funds were the financial institutions, foreign institutional investors or pension funds and high
net-worth individuals.
Some important Venture Capital Funds in India
1. APIDC Venture Capital Limited ,1102, Babukhan Estate,
Hyderabad 500 001
2. Canbank Venture Capital Fund Limited, IInd Floor, Kareem
Towers, Bangalore
3. Gujarat Venture Capital Fund 1997, Ashram Road,
Ahmedabad 380 009
4. Industrial Venture Capital Limited, Thyagaraya Road,
Chennai 600 017
5. Auto Ancillary Fund Opp. Signals Enclave, New Delhi 110
010
6. Gujarat Venture Capital Fund 1995 Ashram
Road Ahmedabad 380 009
7. Karnataka Information Technology Venture Capital Fund
Cunningham Rd Bangalore
8. India Auto Ancillary Fund Nariman Point, Mumbai 400 021
9. Information Technology Fund, Nariman Point, Mumbai 400
021
10. Tamilnadu Infotech Fund Nariman Point, Mumbai 400 021
11. Orissa Venture Capital Fund Nariman Point Mumbai 400 021
12. Uttar Pradesh Venture Capital Fund Nariman Point, Mumbai
400 021
13. SICOM Venture Capital Fund Nariman Point Mumbai 400 021
14. Punjab Infotech Venture Fund Nariman Point, Mumbai 400
021
Venture Capital Investments in India
• The venture capital investment in India till the year 2001 was continuously increased and thereby drastically
reduced.
• Chart I shows that there was a tremendous growth by almost 327 percent in 1998-99, 132 percent in 1999-00,
and 40 percent in 2000-01 there after venture capital investors slow down their investment. Surprisingly, there
was a negative growth of 4 percent in 2001-02 it was continued and a 54 percent drastic reduction was recorded
in the year 2002-2003.
SEBI Venture Capital Funds (VCFs) Regulations, 1996
• A Venture Capital Fund means a fund established in the form of a trust/company; including a body corporate, and
registered with SEBI which,
 has a dedicated pool of capital raised in a manner specified in the regulations and
 invests in venture capital undertakings (VCUs) in accordance with these regulations
• A Venture Capital Undertaking means a domestic company,
 whose shares are not listed on a recognized stock exchange in India and
 which is engaged in the business of providing services/production/manufacture of articles/things but does
not include such activities/sectors as are specified in the negative list by SEBI with government approval-
namely, real estate, non-banking financial companies (NBFCs), gold financing, activities not permitted under
the industrial policy of the Government and any other activity which may be specified by SEBI in consultation
with the Government from time to time.
• Registration: All VCFs must be registered with SEBI and pay Rs.25,000 as application fee and Rs. 5,00,000 as
registration fee for grant of certificate.
Domestic and Foreign Venture Capital
Investments in India
Provisions relating to tax on income received from
venture capital company and venture capital fund
1. Notwithstanding anything in this Code, any income received by a person out of investments made in a
venture capital company or venture capital fund shall be chargeable to income-tax in the same manner as if
it were the income received by such person had he made investments directly in the venture capital
undertaking.
2. The venture capital company, the venture capital fund or the person responsible for making payment of the
income on behalf of such company or fund shall furnish, within such time as may be prescribed, to the
person receiving such income and to the prescribed income-tax authority, a statement in the prescribed
form and manner, giving details of the nature of the income paid during the financial year and such other
relevant details as may be prescribed.
3. The income paid by the venture capital company and the venture capital fund shall be deemed to be of the
same nature and in the same proportion in the hands of the person receiving such income as it had been
received by, or had accrued to, the venture capital company or the venture capital fund, as the case may
be, during the financial year.
Types of Venture Capital Funds
1. VCFs promoted by the Central govt. controlled development financial institutions such as TDICI, by
ICICI, Risk capital and Technology Finance Corporation Limited (RCTFC) by the Industrial Finance
Corporation of India (IFCI) and Risk Capital Fund by IDBI.
2. VCFs promoted by the state government-controlled development finance institutions such as
Andhra Pradesh Venture Capital Limited (APVCL) by Andhra Pradesh State Finance Corporation
(APSFC) and Gujarat Venture Finance Company Limited (GVCFL) by Gujarat Industrial Investment
Corporation (GIIC)
3. VCFs promoted by Public Sector banks such as Canfina by Canara Bank and SBI-Cap by State Bank of
India.
4. VCFs promoted by the foreign banks or private sector companies and financial institutions such as
Indus Venture Fund, Credit Capital Venture Fund and Grindlay's India Development Fund.
The Venture Capital Investment Process:
The venture capital activity is a sequential process involving the following six
steps.
1. Deal origination – through referral system, active search system, and
intermediaries
2. Screening – shortlisting potential investment opportunities
3. Due diligence Evaluation
1. Preliminary evaluation - Brief profile of the venture
2. Detailed evaluation - quality of entrepreneur, business plan, long-term
vision, urge to grow, managerial skills, commercial orientation.
3. Risk analysis - Product risk, Market risk, Technological risk and
Entrepreneurial risk.
4. Deal structuring - negotiate the terms of the deals i.e. the amount, form,
price of the investment, venture capitalist's right to control the company and
to change its management if needed, acquisition, making IPOs etc.
5. Post-investment activity - shaping of the direction of the venture
6. Exist - IPOs, acquisition by another company, purchase of the venture
capitalist's shares by the promoter or Purchase of the venture capitalist's
share by an outsider.
Methods of Venture Financing
Venture capital is typically available in three forms in India, they are:
• Equity : All VCFs in India provide equity but generally their contribution does not exceed 49 percent of the
total equity capital. Thus, the effective control and majority ownership of the firm remains with the
entrepreneur. They buy shares of an enterprise with an intention to ultimately sell them off to make capital
gains.
• Conditional Loan: It is repayable in the form of a royalty after the venture is able to generate sales. No
interest is paid on such loans. In India, VCFs charge royalty ranging between 2 to 15 percent; actual rate
depends on other factors of the venture such as gestation period, cost-flow patterns, riskiness and other
factors of the enterprise.
• Income Note : It is a hybrid security which combines the features of both conventional loan and conditional
loan. The entrepreneur has to pay both interest and royalty on sales, but at substantially low rates.
• Other Financing Methods: A few venture capitalists, particularly in the private sector, have started
introducing innovative financial securities like participating debentures, introduced by TCFC is an example.
Some of the projects financed by the TDICI
• MASTEK , a Mumbai based software firm, in which the TDICI invested Rs.42 lakh in equity in 1989, went
public just three years later, in November 1992. It showed an annual growth of 70-80 percent in the
turnover.
• TEMPTATION FOODS, located in PUNE, which exports frozen vegetables and fruits, went public in November
1992. The TDICI invested Rs.50 lakh in its equity.
• RISHABH INSTRUMENTS of Nasik got Rs.40 lakh from the TDICI. It manufactures a range of meters used in
power stations in collaboration with the ABB Metra Watt of Germany. After making cash losses totaling Rs.25
lakh in two bad years, it turned around in 1989 and showed an increase of over 70 percent in the turnover.
• SYNERGY ART FOUNDATION, which runs art galleries in Mumbai and Chennai and plans to set up in Pune
and Delhi too, had received Rs.25 lakh from the TDICI as convertible loans which were converted into equity
on march 31, 1994. Most of this money has been used for the company's innovative art library scheme at
least paintings to corporate clients.
Top most active VC Firms in India for Startups
• Helion Venture Partners - Yepme, MakemyTrip, NetAmbit, Komli, TAXI For Sure,PubMatic.
• Accel Partners - Flipkart, BabyOye, Freshdesk, Book My Show, Zansaar,Probe, Myntra, CommonFloor.
• Blume Ventures - Carbon Clean Solutions, EKI Communications, Audio Compass, Exotel, Printo.
• Sequoia Capital India - JustDial, Knowlarity, Practo, iYogi, bankbazaar.com
• Nexus Venture Partners - Snapdeal, Housing, Komli, ScaleArc, PubMatic,Delhivery.
• Inventus Capital Partners - Poshmark, Savaari, Farfaria, Policy Bazaar.com, Insta Health Solutions, CBazaar.
• IDG Ventures - UNBXD, Yatra.com, Myntra.com. FirstCry, Zivame,iProf, Ozone Media.
• Naspers - OLX, Flipkart
• Steadview Capital - Olacabs, Flipkart, Saavn, Urban Ladder
• SAIF Partners - Justdial.com, Paytm, Network18, HomeShop18, Book My Show.
• Ascent Capital Advisors - Bigbasket.com, KIMS
• Forum Synergies (India) PE Fund - Zomato, Ola, Quikr, TaxiForSure, Commonfloor, Freecharge, Housing.
Conclusion
In recent years the growth of Venture Capital Business has been drastically decreasing due to many
reasons.
The regulator has to liberalize the stringent policies and pave the way to the venture capital
investors to park their funds in most profitable ventures.
At present many investments of venture capitalists in India remain on paper as they do not have any
means of exit.
Appropriate changes have to be made to the existing systems in order that venture capitalists find it
easier to realize their investments after holding on to them for a certain period of time.
Thank You

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VC Investment Process in India

  • 2. Introduction • The venture capital investment helps for the growth of innovative entrepreneurships in India. • Venture capital has developed as a result of the need to provide non-conventional, risky finance to new ventures based on innovative entrepreneurship. • Venture capital is an investment in the form of equity, quasi-equity and sometimes debt - straight or conditional, made in new or untried concepts, promoted by a technically or professionally qualified entrepreneur. • Venture capital means risk capital. It refers to capital investment, both equity and debt, which carries substantial risk and uncertainties. The risk envisaged may be very high may be so high as to result in total loss or very less so as to result in high gains
  • 3. The concept of Venture Capital Venture capital means many things to many people. It is in fact nearly impossible to come across one single definition of the concept. • Jane Koloski Morris, editor of the well known industry publication, Venture Economics, defines venture capital as 'providing seed, start-up and first stage financing' and also 'funding the expansion of companies that have already demonstrated their business potential but do not yet have access to the public securities market or to credit oriented institutional funding sources. • The European Venture Capital Association describes it as risk finance for entrepreneurial growth oriented companies. It is investment for the medium or long term return seeking to maximize medium or long term for both parties. It is a partnership with the entrepreneur in which the investor can add value to the company because of his knowledge, experience and contact base.
  • 4. The Origin of Venture Capital • In the 1920's & 30's, the wealthy families and individuals investors provided the start up money for companies that would later become famous. • Eastern Airlines and Xerox are the more famous ventures they financed. • Among the early VC funds set up was the one by the Rockfeller Family which started a special fund called VENROCK in 1950, to finance new technology companies. • General Doriot, a professor at Harvard Business School, in 1946 set up the American Research and Development Corporation (ARD), the first firm, as opposed to a private individuals, at MIT to finance the commercial promotion of advanced technology developed in the US Universities. ARD's approach was a classic VC in the sense that it used only equity, invested for long term, and was prepared to live with losers. ARD's investment in Digital Equipment Corporation (DEC) in 1957 was a watershed in the history of VC financing. • While in its early years vc may have been associated with high technology, over the years the concept has undergone a change and as it stands today it implies pooled investment in unlisted companies.
  • 5. Venture Capital in India • In India the Venture Capital plays a vital role in the development and growth of innovative entrepreneurships. • Venture Capital activity in the past was possibly done by the developmental financial institutions like IDBI, ICICI and State Financial Corporations. These institutions promoted entities in the private sector with debt as an instrument of funding. • For a long time funds raised from public were used as a source of Venture Capital. This source however depended a lot on the market vagaries. • In India, the need for Venture Capital was recognized in the 7th five year plan and long term fiscal policy of GOI. In 1973 a committee on Development of small and medium enterprises highlighted the need to faster VC as a source of funding new entrepreneurs and technology. • VC financing really started in India in 1988 with the formation of Technology Development and Information Company of India Ltd. (TDICI) - promoted by ICICI and UTI. • The first private VC fund was sponsored by Credit Capital Finance Corporation (CFC) and promoted by Bank of India, Asian Development Bank and the Commonwealth Development Corporation viz. Credit Capital Venture Fund. • At the same time Gujarat Venture Finance Ltd. and APIDC Venture Capital Ltd. were started by state level financial institutions. Sources of these funds were the financial institutions, foreign institutional investors or pension funds and high net-worth individuals.
  • 6. Some important Venture Capital Funds in India 1. APIDC Venture Capital Limited ,1102, Babukhan Estate, Hyderabad 500 001 2. Canbank Venture Capital Fund Limited, IInd Floor, Kareem Towers, Bangalore 3. Gujarat Venture Capital Fund 1997, Ashram Road, Ahmedabad 380 009 4. Industrial Venture Capital Limited, Thyagaraya Road, Chennai 600 017 5. Auto Ancillary Fund Opp. Signals Enclave, New Delhi 110 010 6. Gujarat Venture Capital Fund 1995 Ashram Road Ahmedabad 380 009 7. Karnataka Information Technology Venture Capital Fund Cunningham Rd Bangalore 8. India Auto Ancillary Fund Nariman Point, Mumbai 400 021 9. Information Technology Fund, Nariman Point, Mumbai 400 021 10. Tamilnadu Infotech Fund Nariman Point, Mumbai 400 021 11. Orissa Venture Capital Fund Nariman Point Mumbai 400 021 12. Uttar Pradesh Venture Capital Fund Nariman Point, Mumbai 400 021 13. SICOM Venture Capital Fund Nariman Point Mumbai 400 021 14. Punjab Infotech Venture Fund Nariman Point, Mumbai 400 021
  • 7. Venture Capital Investments in India • The venture capital investment in India till the year 2001 was continuously increased and thereby drastically reduced. • Chart I shows that there was a tremendous growth by almost 327 percent in 1998-99, 132 percent in 1999-00, and 40 percent in 2000-01 there after venture capital investors slow down their investment. Surprisingly, there was a negative growth of 4 percent in 2001-02 it was continued and a 54 percent drastic reduction was recorded in the year 2002-2003.
  • 8. SEBI Venture Capital Funds (VCFs) Regulations, 1996 • A Venture Capital Fund means a fund established in the form of a trust/company; including a body corporate, and registered with SEBI which,  has a dedicated pool of capital raised in a manner specified in the regulations and  invests in venture capital undertakings (VCUs) in accordance with these regulations • A Venture Capital Undertaking means a domestic company,  whose shares are not listed on a recognized stock exchange in India and  which is engaged in the business of providing services/production/manufacture of articles/things but does not include such activities/sectors as are specified in the negative list by SEBI with government approval- namely, real estate, non-banking financial companies (NBFCs), gold financing, activities not permitted under the industrial policy of the Government and any other activity which may be specified by SEBI in consultation with the Government from time to time. • Registration: All VCFs must be registered with SEBI and pay Rs.25,000 as application fee and Rs. 5,00,000 as registration fee for grant of certificate.
  • 9. Domestic and Foreign Venture Capital Investments in India
  • 10. Provisions relating to tax on income received from venture capital company and venture capital fund 1. Notwithstanding anything in this Code, any income received by a person out of investments made in a venture capital company or venture capital fund shall be chargeable to income-tax in the same manner as if it were the income received by such person had he made investments directly in the venture capital undertaking. 2. The venture capital company, the venture capital fund or the person responsible for making payment of the income on behalf of such company or fund shall furnish, within such time as may be prescribed, to the person receiving such income and to the prescribed income-tax authority, a statement in the prescribed form and manner, giving details of the nature of the income paid during the financial year and such other relevant details as may be prescribed. 3. The income paid by the venture capital company and the venture capital fund shall be deemed to be of the same nature and in the same proportion in the hands of the person receiving such income as it had been received by, or had accrued to, the venture capital company or the venture capital fund, as the case may be, during the financial year.
  • 11. Types of Venture Capital Funds 1. VCFs promoted by the Central govt. controlled development financial institutions such as TDICI, by ICICI, Risk capital and Technology Finance Corporation Limited (RCTFC) by the Industrial Finance Corporation of India (IFCI) and Risk Capital Fund by IDBI. 2. VCFs promoted by the state government-controlled development finance institutions such as Andhra Pradesh Venture Capital Limited (APVCL) by Andhra Pradesh State Finance Corporation (APSFC) and Gujarat Venture Finance Company Limited (GVCFL) by Gujarat Industrial Investment Corporation (GIIC) 3. VCFs promoted by Public Sector banks such as Canfina by Canara Bank and SBI-Cap by State Bank of India. 4. VCFs promoted by the foreign banks or private sector companies and financial institutions such as Indus Venture Fund, Credit Capital Venture Fund and Grindlay's India Development Fund.
  • 12. The Venture Capital Investment Process: The venture capital activity is a sequential process involving the following six steps. 1. Deal origination – through referral system, active search system, and intermediaries 2. Screening – shortlisting potential investment opportunities 3. Due diligence Evaluation 1. Preliminary evaluation - Brief profile of the venture 2. Detailed evaluation - quality of entrepreneur, business plan, long-term vision, urge to grow, managerial skills, commercial orientation. 3. Risk analysis - Product risk, Market risk, Technological risk and Entrepreneurial risk. 4. Deal structuring - negotiate the terms of the deals i.e. the amount, form, price of the investment, venture capitalist's right to control the company and to change its management if needed, acquisition, making IPOs etc. 5. Post-investment activity - shaping of the direction of the venture 6. Exist - IPOs, acquisition by another company, purchase of the venture capitalist's shares by the promoter or Purchase of the venture capitalist's share by an outsider.
  • 13. Methods of Venture Financing Venture capital is typically available in three forms in India, they are: • Equity : All VCFs in India provide equity but generally their contribution does not exceed 49 percent of the total equity capital. Thus, the effective control and majority ownership of the firm remains with the entrepreneur. They buy shares of an enterprise with an intention to ultimately sell them off to make capital gains. • Conditional Loan: It is repayable in the form of a royalty after the venture is able to generate sales. No interest is paid on such loans. In India, VCFs charge royalty ranging between 2 to 15 percent; actual rate depends on other factors of the venture such as gestation period, cost-flow patterns, riskiness and other factors of the enterprise. • Income Note : It is a hybrid security which combines the features of both conventional loan and conditional loan. The entrepreneur has to pay both interest and royalty on sales, but at substantially low rates. • Other Financing Methods: A few venture capitalists, particularly in the private sector, have started introducing innovative financial securities like participating debentures, introduced by TCFC is an example.
  • 14. Some of the projects financed by the TDICI • MASTEK , a Mumbai based software firm, in which the TDICI invested Rs.42 lakh in equity in 1989, went public just three years later, in November 1992. It showed an annual growth of 70-80 percent in the turnover. • TEMPTATION FOODS, located in PUNE, which exports frozen vegetables and fruits, went public in November 1992. The TDICI invested Rs.50 lakh in its equity. • RISHABH INSTRUMENTS of Nasik got Rs.40 lakh from the TDICI. It manufactures a range of meters used in power stations in collaboration with the ABB Metra Watt of Germany. After making cash losses totaling Rs.25 lakh in two bad years, it turned around in 1989 and showed an increase of over 70 percent in the turnover. • SYNERGY ART FOUNDATION, which runs art galleries in Mumbai and Chennai and plans to set up in Pune and Delhi too, had received Rs.25 lakh from the TDICI as convertible loans which were converted into equity on march 31, 1994. Most of this money has been used for the company's innovative art library scheme at least paintings to corporate clients.
  • 15. Top most active VC Firms in India for Startups • Helion Venture Partners - Yepme, MakemyTrip, NetAmbit, Komli, TAXI For Sure,PubMatic. • Accel Partners - Flipkart, BabyOye, Freshdesk, Book My Show, Zansaar,Probe, Myntra, CommonFloor. • Blume Ventures - Carbon Clean Solutions, EKI Communications, Audio Compass, Exotel, Printo. • Sequoia Capital India - JustDial, Knowlarity, Practo, iYogi, bankbazaar.com • Nexus Venture Partners - Snapdeal, Housing, Komli, ScaleArc, PubMatic,Delhivery. • Inventus Capital Partners - Poshmark, Savaari, Farfaria, Policy Bazaar.com, Insta Health Solutions, CBazaar. • IDG Ventures - UNBXD, Yatra.com, Myntra.com. FirstCry, Zivame,iProf, Ozone Media. • Naspers - OLX, Flipkart • Steadview Capital - Olacabs, Flipkart, Saavn, Urban Ladder • SAIF Partners - Justdial.com, Paytm, Network18, HomeShop18, Book My Show. • Ascent Capital Advisors - Bigbasket.com, KIMS • Forum Synergies (India) PE Fund - Zomato, Ola, Quikr, TaxiForSure, Commonfloor, Freecharge, Housing.
  • 16. Conclusion In recent years the growth of Venture Capital Business has been drastically decreasing due to many reasons. The regulator has to liberalize the stringent policies and pave the way to the venture capital investors to park their funds in most profitable ventures. At present many investments of venture capitalists in India remain on paper as they do not have any means of exit. Appropriate changes have to be made to the existing systems in order that venture capitalists find it easier to realize their investments after holding on to them for a certain period of time.