Venture Capital

1. Presentation on –
“Venture Capital”
Presented By -
Shete Shubham
M.com ( Banking & Finance), MBA ( International Finance & Banking)

3. Sr. No Topic
1. Introduction
2. Nature & Scope of venture capital
3. Regulatory Framework
4. Problems Of Venture Capital
5. Venture Capital Investment Process
6. Present Scenario Of Venture Capital In India
6. Global Experience Of venture Capital
7. Conclusion
8. Reference
Index

4. Introduction -
Venture capital is a growing business of
recent origin in the area of industrial financing in India. The term
“Venture Capital” is understood in many ways. In narrow sense, it
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 firm’s specializing in new ideas or new
technologies.
Definitions -
A Venture Capital company is defined as ‘a
financing institution which joins an entrepreneur as a co-promoter in
a project and shares the risks and reward of the enterprise’.

5. The SEBI defined Venture Capital fund in its regulation 1996 as
‘a fund established in the form
of a company or trust which raises money through loans,
donations, issue of securities or units as the case may be and
makes or proposes to make investment in accordance with the
regulations’
Nature of Venture Capital -
 Venture Capital is usually in the form of 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.

6. 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 Capitalists join the entrepreneur as a co promoter
in projects and share the risks and rewards of the enterprise.
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 disinvestment.
Investment is usually made in small and medium scale
enterprises.

7. Scope of Venture Capital
1. Promotion of Enterprise
The entrepreneurs promote or establish the
enterprise, after assessing the business opportunities.
Venture capital is required for gaining knowledge about these
opportunities, making forecasts, determining the objectives, deciding the
location, preparing plant layout, registration of the enterprise and
completion of other formalities.
2. Formulation of Firm
The capital venture is also required for the
formation of the firm after the practical shape is given to the idea of
the entrepreneur.
In other words, the form of the organization, single, partnership,
company or any other form will be decided whether less or more capital
is required?

8. 3. Production of the Product
For the production of any
product, the firm has to face not only Complex problems but
has to arrange adequate capital.
Without that, it will not be possible to give returns to the
sources deployed for production.
In that case, production of the product will be getting blocked.
4. Management, Organisation, and Control
Venture Capital is
required to appoint the employees, officers, and
subordinates to continuously have a watch on the quality of
the product and to see that the organization is working
properly according to the objectives and also see that
performance is in consonance with the determined targets.

9. 5. Other Areas
Besides the aforesaid scope of venture capital, it is
also required for the search of additional new opportunities,
participation in development programs, contribution in
social development and future of the Enterprise

10. Venture Capital in India governs by the SEBI Act, 1992 and
SEBI (Venture Capital Fund) Regulations, 1996. According
to which, any company or trust proposing to carry on activity of
a Venture Capital Fund shall get a grant of certificate from
SEBI. However, registration of Foreign Venture Capital
Investors (FVCI) is not obligatory under the FVCI regulations.
Venture Capital funds and Foreign Venture Capital Investors are
also covered by Securities Contract (Regulation) Act, 1956,
SEBI (Substantial Acquisition of Shares & Takeover)
Regulations, 1997, SEBI (Disclosure of Investor
Protection) Guidelines, 2000
Regulatory framework of Venture Capital in India

11. Constitution of Venture Capital Funds
There are three layers of structured or institutional venture capital funds i.e. venture
capital funds set up by high net worth individual investors, venture capital subsidiaries of
corporations and private venture capital firms/ funds. Venture funds in India can be
divided on the basis of the type of promoters.
1. Venture Capital Funds promoted by the Central government 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. It is 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. Venture Capital Funds promoted by the foreign banks or private sector
companies and financial institutions such as Indus Venture Fund and Grind
lay's India Development Fund.

12. Limitations of Venture Capital Financing
The various problems/ queries can be outlined as follows:
1. Requirement of an experienced management team.
2. Requirement of an above average rate of return on
investment.
3. Longer payback period .
4. Uncertainty regarding the success of the product in the
market.
5. Questions regarding the infrastructure details of
production like plant location, accessibility, relationship with
the suppliers and creditors, transportation facilities, labor
availability etc.
6. The size of the market.
7. Skills and Training required and the cost of training.
8. Major competitors and their market share

13. Problems of venture capital funds in India as follows:
Mismatch:
There is a mismatch between the kind of venture capital
available and what the market demands. VCFs are mostly targeting
IT firms, pharmaceutical firms or certain service industries that require
expansion financing of Rs 15crores or more. there are very few firms
that are in need of funds but are unable to attract venture capital funds.
Dependence on foreign investors:
Most VCFs in India are a division of
the global investment institutions, and international funds which
represent more than 95% of the venture capital invested in India. Their
functioning is dictated by the policies of the parent company and often
the local market needs are ignored. currency risk also affects their
performance. Many nations have understood the importance of
developing the local venture capital industry than demanding on the
foreign funds.

14. Poor quality corporate governances:
In the event of any failure
of partners on their contractual obligations, there is no sound
legal redressed of grievances of partners involved in the
process. as a result, the aggrieve4d parties in India often agree
to settlements that are unfair to them.
Lack of strong trade association:
The venture capital industry in India
lacks a broad-based and effective trade association.

16. Venture Capital Investment Process
 Deal Origination
 Screening
 Evaluation
 Deal Negotiation
 Post Investment Activity
 Exit Plan
Deal origination
Origination of a deal is the primary step in venture
capital financing. It is not possible to make an investment without a deal
therefore a stream of deal is necessary however the source of origination of
such deals may be various. One of the most common sources of such
origination is referral system. In referral system deals are referred to the
venture capitalist by their business partners, parent organizations, friends
etc.

17. Screening
Screening is the process by which the venture capitalist
scrutinizes all the projects in which he could invest. The projects are
categorized under certain criterion such as market scope, technology or
product, size of investment, geographical location, stage of financing etc. For
the process of screening the entrepreneurs are asked to either provide a brief
profile of their venture or invited for face-to-face discussion for seeking
certain clarifications.
Evaluation
The proposal is evaluated after the screening and a detailed study
is done. Some of the documents which are studied in details are projected
profile, track record of the entrepreneur, future turnover, etc. The
process of evaluation is a thorough process which not only evaluates the
project capacity but also the capacity of the entrepreneurs to meet such
claims. Certain qualities in the entrepreneur such as entrepreneurial skills,
technical competence, manufacturing and marketing abilities and experience
are put into consideration during evaluation. After putting into consideration
all the factors, thorough risk management is done which is then followed by
deal negotiation.

18. Deal negotiation
After the venture capitalist finds the project
beneficial he gets into deal negotiation. Deal negotiation is a process
by which the terms and conditions of the deal are so formulated
so as to make it mutually beneficial. The both the parties put
forward their demands and a way in between is sought to settle the
demands. Some of the factors which are negotiated are amount of
investment, percentage of profit held by both the parties, rights of
the venture capitalist and entrepreneur etc.
Post investment activity
Once the deal is finalized, the venture
capitalist becomes a part of the venture and takes up certain
rights and duties. The capitalist however does not take part in the
day to day procedures of the firm; it only becomes involved during
the situation of financial risk. The venture capitalists participate in the
enterprise by a representation in the Board of Directors and ensure
that the enterprise is acting as per the plan.

19. Exit plan -
The last stage of venture capital investment is to
make the exit plan based on the nature of investment, extent
and type of financial stake etc. The exit plan is made to make
minimal losses and maximum profits. The venture capitalist
may exit through IPOs, acquisition by another company,
purchase of the venture capitalists share by the promoter or an
outsider.

20. Present Scenario Of Venture Capital In India -
 India currently has more than about 400 Venture capital firms.
 Unlike before as observed in the early stages of the industry’s
growth the investments were inclined largely towards the IT
sector, but within 8 years of success stories now in 2019 Venture
capital firms are now interested in nearly all sectors.
 With developing Indian entrepreneurship standards, government
support , policies and globalization policies there are vast
opportunities for private equity investors to capitalize on.
 Preferred regions for VC investments are Mumbai, Delhi and
NCR, followed by Bangalore. Although companies in South
India attracted a higher number of investments, in value terms
Western India did much better. Among cities, Mumbai-based
companies retained the top slot with 108 private equity investments,
followed by Delhi/NCR with 63 investments and Bangalore with 49
investments.

21. Industry No Of Deal Deal Value (in $
Million)
Internet Software & Services 399 3275
Software 357 2260
Internet & Catalog Retail 236 2807
Diversified Consumer Services 105 429
Media 104 496
The chart displays the venture capital finance in the
internet software and services was top with the highest
deal of 399 which amounted $-3275, and followed by
software $-2260, and then internet and catalog retail $-
2807, next diversified consumer services $- 429 and the
last by the media which stood at $-496.

22. Global Experiences of Venture Capital -
Venture capital markets
have evolved around the world since the mid-1980s, with a
particularly rapid expansion phase being seen in the late 1990s.
This development has been fueled both by public and private
efforts, with the latter gradually becoming dominant in terms
of investment value. Starting with the sharp contraction in
2001, however, a heavy consolidation of funds took place in
most industries, and especially in high-tech. Having obtained
heavy funding, many dotcoms subsequently faltered. Some
went bankrupt, whereas others were appropriated by larger
ones at a fraction of their previous valuations. Meanwhile, the
number of venture capital funds dropped worldwide.

23. In recent years
2006: venture capital invested $7.4 billion on renewable
energies with an increasing of 146% respect the last year;
2008: in the last months of the year a drop in the market
occurred
in 2012 global VC investment declined by 20%.
the amount raised via IPO declined globally by 27% from
US$22.1b in 2011 to US$16.1b in 2012.
VC investment remains strongest in the US and Europe –
falling only 15% in 2012, compared to more than 40% in
Israel and China. India was the only country to see an
increase in the number of investment rounds.
VCs are increasingly directing investment at the generating
revenue stage and focusing less on product development, pre-
revenue business, seeing this as a less high risk option.

28. Conclusion –
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 Capitalists join
the entrepreneur as a co promoter in projects and
share the risks and rewards of the enterprise.
Venture capital fills the gaps left by the traditional
forms of financing.

29. References –
Financial Market and Services- E. Gordon and K.
Natarajan,- Himalaya Publication House, Delhi -10th
Edition , 2013.
Financial Markets, Institutions and Financial Services, -
Clifford Gomez, - PHI Learning Private Limited, New
Delhi, - 3rd Editions, 2008