Venture Capital Financing
Venture Capital Financing
Venture Capital Financing
[Document subtitle]
CHAPTER 1: INTRODUCTION
Venture capital refers to the financial support provided by the venture capitalists to the new, budding
companies or startups which have a great potential to grow and transform into a profitable venture.
Venture capital is the money which is invested in businesses which are in its initial stage but have a high
potential to grow big. It is characterized by high risk and high return. Therefore, it plays an important
role entrepreneurs who have new ideas. One can say that venture capital is most suitable for those
companies and startups which require a huge amount of capital at the start and does not have any cheap
alternatives in front of them.
Evolution of Indian VC industry
Venture investing in India can be traced back to the establishment of the risk capital foundation, which
was the result of Government’s initial efforts to provide risk capital. There have been many other such
efforts to provide risk funding such as creation of Technology Development Fund (TDF) which was
formed from the chess levied on all the technology imports in the Government’s budget in 1986 and
other quasi market-based initiatives like Programmed for Advancement of Commercial Technology
(PACT). The start of institutional VC in India is deeply connected with the creation of the Technology
Development and Information Company of India which was a joint fund management venture between
ICICI Bank and Unit Trust of India.
The development of the venture capital industry in India in those days can be broadly classified into four
phases. In the phase 1, the main players were the domestic fund management entities. In the second
phase foreign funds were introduced. It is also referred as the “Internationalization” of venture capital in
India. Draper International was the first international venture fund management enterprise to bring
international fund management practices and international investment capital in India. The market was
introduced to more international players during the third phase and the fourth phase marked the
rationalization of the industry after the technology boom period. There was a rejuvenated investment
interest in India from 2004 as a result of high rate of growth of the Indian economy and certain sectors
such as tech manufacturing etc.
Fig 1.1 Venture capital evolution in India
Instrument Issues
Loans Clean and secured
Interest bearing and non-interest bearing
Convertible and Warrants.
Maturity
Straight Equity and Convertibles are most used instrument in India. Also, the warrants are issued as a tool
to bring the price down.
Post-Investment Activities:
After the deal has been structured and finalized, the venture capitalist plays the role of a partner and
collaborator. He also gets involved in shaping the organization. The degree of involvement in the company
depends on the policy of venture capitalist. The venture capitalist does not get involved in the day to day
operation of the organization but if there are any financial problems occur, he may intervene and bring in
a new team.
Exit:
The Venture capitalists want their investment back in 5-10 years after the initial investment. A venture
may exit in the following ways:
a. Initial Public Offering (IPO)
b. Acquisition
c. Purchase of venture capitalists shares by the promoter.
d. Purchase of venture capitalists shares by an outsider.
Stages in Venture Capital
Seed Stage:
In this stage, a small amount of capital is provided to an entrepreneur to market a better idea having future
prospects. The investor investigates into the business plan before making any investment and, if he is not
satisfied with the idea or he does not see any potential in the idea/product, then the investor may not
consider financing the idea. But in case if the part of the idea is worth, then the investor may spend some
time and money further on the idea. At this stage, the risk factor is very high because there are many
uncertain factors.
Startup Stage:
If the idea is fit for further investigation, then the process moves on to the second stage, also known as the
Start-up stage. At this stage Venture Capital has to submit a business plan which must include the
following:-
All the above analysis needs to be submitted, in order to decide, whether or not, Venture Capital to take
the project or not. This type of financing is provided to complete product development and commence
initial market strategies.
Second Stage:
At this stage, the idea transforms into a product and is being sold. The main goal at this stage is that
Ventures tries squeezing between the rests and getting some market shares from the competitors. The
management is being monitored by the Venture Capital firms in order to know the capability of the team
just to ensure the development process of the product and how they respond to the competitors. If the
firms find out that the capabilities are against the competition. Then the Venture Capital might not go to
the next stage. At this stage of financing, working capital is provided for the expansion of the business in
terms of growing accounts and inventory. At this stage, risk factor decreases as the product is not
developing at the former start-up stage. But it concentrates on the promotion and sales of the product.
Third Stage:
This stage is also called as later stage finance. Capital is provided to an enterprise that has basic marketing
set-up, typically for market expansion, acquisition product development etc. At a later stage, ventures try
to multiply market shares by increasing the sales of the product and having better marketing promotion.
Venture Capital monitors objectives of earlier stages i.e. second stage and also of the current stage to
evaluate whether the team has made the expected cost reduction or not. Venture Capitalists prefer this
stage than any other stages as the rate of failure in the later stage is low. It is also because firms at this
stage have a track record of the management, past performance data and established the procedure for
financial data. Risk at this stage is still decreasing because venture relies on the income from the sales of
the current product.
IPO Stage:
This stage is also known as a bridge finance stage. It is the last round of financing before exit. The Ventures
at this stage gain a certain amount of shares which gives them opportunities, such as merger and
acquisition, eliminating the competitors, keeping away new companies from the market. At this stage,
Venture has to determine the product position, and if possible, reposition it attract the new market.
Chapter 3 : Company Profile
Blume Ventures
Blume Venture Advisors is a venture capital firm specializing in early-stage, seed stage, start-ups, pre-
series A, series B, and late stage investments in the Fintech sector. The firm prefers to invest in 80 percent
in technology ventures including internet and software sectors, data infrastructure, biotechnology, mobile
application, telecommunications equipment, media, consumer internet, research and development,
mobile, and 20 percent in alternative technology sector including clean technology and robotics. It
provides seed funding between $0.05 million and $0.3 million in seed stage and doubles its investment
size where it co-invests. The firm also makes follow-on investments to its portfolio companies, ranging
between $0.5 million and $1.5 million. It seeks to co-invest with angel investors, syndicates, and venture
capital firms. The firm also provides mentoring and support to its portfolio companies. Blume Venture
Advisors was founded in 2010 and is based in Mumbai, India.
Sequoia Capital
Sequoia Capital India is a venture capital firm specializing in investments in startup, seed, early, mid,
late, series-A, expansion stage, public and growth stage companies. The firm prefers to invest in
maturing startups in the information technology sector with a focus on the emerging India-US cross
border companies in the big data analytics, enterprise software, and semiconductors sectors. It seeks to
invest in the consumer services, energy, financial services, infrastructure, healthcare services, internet,
mobile applications, and outsourcing, wireless and technology sectors. In consumer services it invests in
agriculture, distribution, education, hospitality, media, retail, packaged goods, and enabling technology.
Within energy it focuses on alternative energy, conventional energy, energy efficiency, energy storage,
and energy services markets. In financial services it focuses on banking, brokerage, payments, and
enabling and financial technology. Within healthcare it focuses on diagnostic services, healthcare
Information Technology, pharmaceuticals, genetics services, lab services, patient services, product
development services, and enabling technology. Within internet it focuses on advertising,
communications, cloud computing, ecommerce, gaming, media, search, social networking and enabling
technology. Within mobile it focuses on advertising, applications, communications, devices, gaming,
monetization, and enabling technology. Within outsourcing it focuses on business process outsourcing,
hosting services, managed services, professional services and software development services. Within
technology it focuses on engineer carrier infrastructure, data, enterprise infrastructure, open source,
SaaS, security, semiconductors, services and storage. The firm will also invest in companies outside
India that can leverage or can potentially leverage India's technology resources. It seeks to invest
between $0.1 million and $100 million in its portfolio companies. The firm invests between $100,000
and $1 million in seed stage, between $1 million and $10 million in early stage, and between $10 million
and $100 million in growth stage companies. It prefers to act as the lead investor in most transactions. In
selected situations the firm partners with other leading venture firms and acts as a co-lead investor. It
prefers to take a seat on the board of directors of its portfolio companies. Sequoia Capital India was
formed in 2000 and is based in Bengaluru, India with additional offices in Mumbai and New Delhi,
India; Singapore, Menlo Park, California, Herzliya, Israel, Hong Kong, and Beijing, Shanghai, China.
Sequoia Capital India operates as a subsidiary of Sequoia Capital.
Chapter 4 : Objectives
To study the current scenario of venture capital finance in India.
To analyse the growth of venture capital investment in different sectors of economy.
To lookout for market share of different economic sectors in terms of venture capital
investments.
Chapter 5: Case research methodology
Data collection:
The research report is based on the secondary data available on venture capital investments. The data is
collected from different reports and other online resources.
Research design:
Descriptive research design was used for the present case research. A descriptive study is one in which
information is collected without changing the environment (i.e., nothing is manipulated). It is used to
obtain information concerning the current status of the phenomena to describe "what exists" with respect
to variables or conditions in a situation.
Research objective:
To study the evolution and growth of venture capital industry at national (India) level.
Chapter 6 : Limitations
The data required was secondary which was not easily available.
The study is based on the data provided by different sources, any incorrectness or biasness in
same might also have been resulted in same for this study.
Chapter 7: Data analysis and interpretation
Fund raising by the venture capitals in 2017 increased by 33% from US$ 4.3 billion in 2016 to US$ 5.8
billion which further added to the already high levels of dry powder available with these venture capital
funds.
https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/early-stage-venture-capital-
investments-in-india-plunge-to-3-year-low-in-2017/articleshow/62235948.cms
https://www.investopedia.com
https://www.ey.com/Publication/vwLUAssets/ey-pe-vc-agenda-india-trend-book-2018/$File/ey-pe-vc-
agenda-india-trend-book-2018.pdf
https://www.thehindubusinessline.com/specials/emerging-entrepreneurs/the-look-and-feel-of-the-
indian-vc-fund/article9844564.ece