Venture capital

Venture Capital

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

2. 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

3. 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’.

4. 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.

5. 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.

6. 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?

7. 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.

8. 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

9. 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

10. 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.

11. 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

12. 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.

13. 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.  

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.

19. 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.

20. 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.

21. 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 U S$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.  

22. 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.

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