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CHAPTER 1
INTRODUCTION

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 CHAPTER 1: INTRODUCTION

1.1 VENTURE CAPITAL FINANCING

Business requires capital, and getting it at the right time is very important. There are several alternatives

to fund the business. A brief heading to name a few would be :

 Owner or proprietor’s capital

 Equity partner

 Debt Finance

These can be further be branched to many options giving entrepreneur several options to choose among.

In this study the focus would be more on venture capital which comes under equity partner as well as

under debt financing.

Venture capital is a risk financing in the form of equity or quasi-euity. It gives the business funds based

on their potential and their interest as perceived by the investor. Funds might be required for seed stage

funding, expansion/development funding or for acquisition financing. Venture capital is established

among developed countries and is developing in third world countries because of its impact on

encouraging entrepreneurial activities within a nation. Venture Capital firms invest funds on any

business with a professional outlook, they focus on their primary segment which vary among different

specializations (e.g. e-commerce, Oil & Gas, Healthcare, Manufacturing, Health/life sciences, etc.). 1

/handle/2134/6819.

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Venture capital in India today has three forms

 Equity

 Conditional loans

 Income notes

The number of venture capital firms are raising in India due to the well-developed avenues for buying

and selling of shares within SME’s, huge tax benefits for the venture capitalist and support from

government policies. Venture capital plays a strategic role to build potential business/enterprises to

reach a level where they can reap their capital gains and can cash out these gains by leading directing

their financed venture to any of the following exit routes:

 Initial public offerings (IPO)

 Acquisition by other company

 Purchase of venture capitalist’s share by other investors or promoters

This is done when the Venture capitalist realizes the required return of return on his primary capital

invested on the business to take the exit route. Venture capital financing helps both the entrepreneurs as

well as the venture capitalist to realize their goals.

With venture capital financing, the venture capitalist acquires an agreed proportion of the equity of the

company in return for the funding that he offers.

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This could be summarized as follows :

 Equity participation

 Long term investment

 Participation in management

The rate of return on this capital lies within the success of the business venture. Venture capital Equity

finance thereby offers the advantage of having no interest charges. It is "patient" capital that seeks a

return through long-term capital gain rather than immediate and regular interest payments, as in the case

of debt financing. Given the nature of equity financing, venture capital investors are therefore exposed

to the risk of the company failing. As a result the venture capitalist must look to invest in companies

which have the ability to grow very successfully and provide higher than average returns to compensate

for the risk. 2

Venture capitalist’s management approach differ to that of a lender or a bank. The bank does not

participate with the management and keeps its ties away from the venture’s management, operations and

other decision making. When venture capitalists invest in a business they typically direct and guide the

venture so as to lead it towards capital gains. They are a crucial part of the company's decision making

and occupy a place in board of directors. These professional venture capitalists act as mentors and aim to

provide support and advice on a range of management, sales and technical issues to assist the company

to develop its full potential.3

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1.2 BACKGROUND OF THE STUDY:

Today due to the economic crisis and the change in job market. Entrepreneurship has gained market. A
number of technocrats in India today plan to setup their own shops and capitalize this opportunities. In
today’s highly dynamic economic climate with regular technological inventions, few traditional business
models may survive but margin lies more towards more innovative business ideas. Today it is not the
conglomerates that fuel economic growth but are the new SMEs and other innovative businesses.

The bright reason for global economic growth today lies in the hand of the small and medium
enterprises. For example, in India SMEs alone contribute to almost 40% of the gross industrial value
added in the Indian economy.

Whereas in the United States 55% of their global exports are supported by very SMEs with not more
than 50 employees and 10% exports are generated by companies with 800 or more employees.

There is a paradigm shift from the earlier physical production and economies of scale model to new
ventures with technological advancements providing services and under process industry.

However, staring an enterprise has its own risk and is never easy. There are number of parameters that
contribute to its success or downfall. That is why entrepreneurs find it difficult to find the right venture
capitalist and miss the right way to approach them. However, there are methods and a right protocol for
any entrepreneur to reach out his investor in a right way and thereby get the funding and that is our topic
of study here.

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1.3 NEED FOR THE STUDY

 The study has been conducted for gaining the practical knowledge about Venture capital finance
and various operations to reach them in a right manner.

 The study has been undertaken as a part of PGDM_MBA curriculum from 1st jan.to Feb 28th
2013 for the fulfilment of the requirement of PGDM_ MBA degree.

The study covers the domain of conditions checked by the VC firms before heading towards funding the
venture, This is the link where the entrepreneur miss their chance due to not having the know-how of
how to approach a potential VC for his funding needs.

The Venture capitalist on the other hand will have a specific format in their requirement sheet which the
entrepreneur has to add maximum value, to gain his attention and thereby to get evaluated for his
venture funding

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1.4 OBJECTIVE OF THE STUDY

 To understand the right method to reach to a venture capital firm with the required financial
presentation and business plan.

 To understand about the working of Venture Capital Financing and data required by them.

 To study the sources and allocation of Venture Capital Financing.

1.5 SCOPE OF THE STUDY

The scope of the study was to realize the funding lifecycle in a practical format, by preparing business
case for entrepreneurs and help them seek a VC. To realize the theoretical aspect of the study into real
life work experience by analyzing the financials of the venture and guiding business finance to them.
The study of financials and possible funding that could be approved is based on the tools such as Size
wise analysis and Ratios. The study is based on the last 5 years Annual Reports of venture capital firms
and fund seeking ventures.

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1.6 LIMITATIONS OF THE STUDY

 All the data presented for the venture capital financing are limited to few firms and for the last 5
years. The information provided to the researcher may be over simplifications of
facts over generalization from insufficient data.

 Financial analysis of fund seeking ventures does not measure the qualitative aspects
of the b usin ess . I t d oes n ot sho w t he skill s , t e chni ca l kno w- h ow an d t he
e f f i c i e n c y o f i t s emplo yees an d man age r s

 I t do es n ot rev eal t h e fairn ess of s el ec tion c ri te ri a b y a v entu re cap i

t al f i rm.

1.7 DATA COLLECTION

 Primary sources include surveys done across 100 respondents across different sectors from
SMEs and VC firms and further discussion with the managers at Funding Solutionz.

 Secondary Sources were case studies, journals, financial records, books.

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1.8 SAMPLING DESIGN

 Sampling Unit:-Financial Statements, VC firms list, funding/yr

 Sampling Size:-Last 5 years Financial Statements

1.9 TOOLS USED

SPSS (17) and Microsoft Office Excel 2007 Cross tabulation and chi-square statistics

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 CHAPTER 2
RESEARCH METHODOLOGY

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2.1 OBJECTIVE OF THE STUDY

Understand the concept of venture capital .

.
Capital funding is different from traditional sources of financing. Venture capitalists finance innovation and ideas
which have potential for high growth but with inherent uncertainties. This makes it a high-risk, high return investment.

Study venture capital industry in India.

Scientific, technology and knowledge based ideas properly supported by venture capital can be propelled into a
powerful engine of economic growth and wealth creation in a sustainable manner. In various developed and
developing economies venture capital has played a significant developmental role.

Study venture capital industry in global scenario. .

Venture capital has played a very important role in U.K., Australia and Hong Kong also in development of technology
growth of exports and employment

Study the evaluation & need of venture capital industry in India.

India is still at the level of ‘knowledge’. Given the limited infrastructure, low foreign investment and other transitional
problems to the next stage.

Understand the legal framework formulated by SEBI to encourage venture capital activity in Indian economy .

Promoting sound public policy on issues related to tax, regulation and securities through representation to the
Securities and Exchange Board of (RBI) and other Government departments

Find out opportunities that encourage & threats those hinder venture capital industry in India.

To know the impact of political &economical factors on venture capital investment.

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2.2 RESEARCH OBJECTIVE

To answer the research questions as highlighted in the table above, following specific research objectives have been set for the
study.

1 study the evolution and growth of venture capital industry at international (US, Europe and Asia-Pacific), national
(India) and regional level (Gujarat).

2 To investigate in detail the decision determinants of Indian venture capitalists in relation to pre-investment strategies,
post-investment activities, monitoring and controlling of the investee, investor-investee relationship, syndication,
geographical preference for investment and the divestment of the VCs from the business of the investee.

3 To investigate the structure and functioning of VC firms and their invested companies
.

4 To examine the role played by the venture capitalists in the growth of the ventures funded by them in Gujarat
(Specifically of GVFL).

5 To find out the funding preferences of young entrepreneurs from Gujarat.

6 To make suggestions for the further development of the venture capital industry at national level (India) and regional
level (Gujarat).

2.3 RESEARCH DESIGN

In India neither venture capital theory has been developed nor are there many comprehensive books on the subject. Even the
number of research papers available is very limited. The research design used is descriptive in nature. (The attempt has been
made to collect maximum facts and figures available on the availability of venture capital in India, nature of assistance granted,
future projected demand for this financing, analysis of the problems faced by the entrepreneurs in getting
Capital analysis of the venture capitalist and social and environmental impact on the existing framework

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2.4 DATA COLLECTION

1 STATEMENT OF PROBLEMS

Venture capital is in its nascent stages in India. The emerging scenario of global competitiveness has put an
immense pressure on the industrial sector to improve the quality level with minimization of cost of products by
making use of latest technological skills.

The various problems/ queries can be outlined as follows:

Problems regarding the infrastructure details of production like plant location, accessibility, relationship with the
suppliers and creditors, transportation facilities, labor availability etc.

The limited infrastructure, low foreign investment and other transitional problems, because of above three reasons
availability of fund is very low in market.

Uncertainty regarding the success of the product in the market.

As there is requirement of an experienced management team, Due to unavailability of experienced and skilled
people it is difficult to analyze the future growth of the product in the market.

The term venture capital comprises of two words that is, “Venture” and “capital”. “Venture” is a course of
processing the outcome of which is uncertain but to which is attended the risk or danger of “Loss”. “Capital” means
recourses to start an enterprise. To connote the risk and adventure of such a fund, the generic name Venture Capital
was coined.

Venture capital is considered as financing of high and new technology based enterprises.

It Venture capital has also been described as ‘unsecured risk financing’. The relatively high risk of venture capital is
compensated by the possibility of high return usually through substantial capital gains in term.

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2 CONCEPTUAL FRAMEWORK

A. Concept of venture capital

The term venture capital comprises of two words that is, “Venture” and “capital”. “Venture” is a course
of processing the outcome of which is uncertain but to which is attended the risk or danger of “Loss”.
“Capital” means recourses to start an enterprise. To connote the risk and adventure of such a fund, the
generic name Venture Capital was coined.

Venture capital is considered as financing of high and new technology based enterprises.

It Venture capital has also been described as ‘unsecured risk financing’. The relatively high risk of
venture capital is compensated by the possibility of high return usually through substantial capital gains
in term

B Features of venture capital

1. High risk

2. High tech

3. Equity participation and capital gain

4. Participation in management

5. Length of investment

6. Illiquid investment

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1.High risk

By definition the Venture capital financing is highly risky and chances of failure are high as it provides long term
start up capital to high risk- high reward ventures. Ventures capital assumes four type of risks, these are:

-Inability of management teams to work together.

-Product may fail in the market.

-Product may not be commercially viable.

1 Operation risk
Operation may not be cost effective resulting in increased cost decreased gross margin.

2 High tech

As opportunities in the low technology area tend to be few of lower order, and hi-tech projects generally offer
higher returns than projects in more traditional area, venture capital investments are made in high tech

3 Equity participation and capital gain

Investments are generally in equity and quasi equity participation through direct purchase of share, options,
convertible debentures where the debt holder has the option to convert the loan instruments into stock of the
borrower or a debt with warrants to equity investment. The funds in the form of equity help to raise term loans that
are cheaper source of funds. In the early stage of business, because dividends can be delayed, equity investment
implies that investors bear the risk of venture and would earn a return commensurate with success in the form of
capital gains.

4 Participation in management
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Venture capital provides value addition by managerial support, monitoring and follow up assistance. It monitors
physical and financial progress as well as market development initiative. It helps by identifying key resource
person. They want one seat on the company’s board of directors and involvement, for better or worse, in the major
decision affecting the direction of company

5 Length of investment

Venture capitalist help companies grow, but they eventually geek to exit the investment in three to seven years. An
early stage investment may take seven to ten years to mature, while most of the later stage investment takes only a
few years, The process of having significant returns takes several years and calls on the capacity and talent of
venture capitalist and entrepreneurs to reach fruition.

6 Illiquid of investment

Venture capital investments are illiquid, that is not subject to repayment on demand or following a repayment
schedule. Investors seek return ultimately by means of capital gain when the investment is sold at market place. The
investment is realized only on enlistment of security or it is lost if enterprise is liquidated for unsuccessful working.
It may take several years before the first investment starts too locked for seven to ten years. Venture capitalist
understands this illiquidity and factors this in his investment decision.

3 PLAYERS IN VENTURE CAPITAL

There are following group of players:

Angels and angel club

Angels are wealthy individuals who invest directly into companies. They can form angel clubs to coordinate and
bundle their activities.

Small and upstart capital funds

These are smaller Venture Capital Companies that mostly provide seed and startup capital. The so called “Boutique
firms” are often specialized in certain industries or market segments. Their capitalization is about USD 20 to USD
50 million (is this deals size or total money under management or money under management per fund?). As for
small and medium Venture capital funds strong competition will clear the market place. There will be mergers and
acquisitions leading to a concentration of capital. Funds specialized in different business areas will form strategic
partnerships.

Only the more successful funds will be able to attract new money. Examples are:

O Artemis Comford

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O Abbell Venture Fund

O Acacia Venture Partners

Medium venture funds

The medium venture funds finance all stages after seed and operate in all business segments. They provide money
for deals up to USD 250
Large venture funds

As the medium funds, large funds operate in all business sectors and provide all types of capital for companies after
seed stage. They often operate internet funds to improve size, reputation

And their financial muscle. In addition they will to diversifr. Possible areas to enter are other financial services by
means of M&As with financial services corporations

And the consulting business. For the latter one the funds have a rich resource of expertise and contacts in house. In
a declining market for their core activity and with lots of tumbling companies out there is no reason why Venture
Capital funds should offer advice and consulting only to their investees.

Examples are:

O AIG American International

Group Cap Vest man

Corporate venture funds

These Venture Capital funds are set up and owned by technology companies. Their aim is to widen the parent
company’s technology base in an win-win-situation for both, the investor and the investee.

Types of project : Venture Capital projects are high risk, high technology and long term projects.

Management : Venture Capital projects are managed jointly by the entrepreneurs and Venture Capitalists.
However, Venture Capitalist should not interfere in day to day activities of the management. The Venture Capitalist
can take active part in the management and decision-making.

New venture : Venture Capital investment is generally made in new enterprises which use new technology to
produce new products, with an expectation of high gains or sometimes, spectacular returns.

Continuous involvement : Venture Capitalists continuously involve themselves with the client’s investments,
either by providing loans or managerial skills or any other support.

Mode of investment : Venture Capital is basically an equity financing method, the investment being in relatively
new companies when it is too early to go to the capital market to raise funds. In addition, financing also takes the
form of loan
finance/convertible debt to ensure a running yield on the portfolio of the Venture Capitalists.

Objectives : The basic objective of a Venture Capitalist is to make a capital gain in equity investment at the time of

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exit, and regular on debt financing. It is a long-term investment in growth-oriented small/medium firms. It is a long-
term capital which is injected to enable the business to grow at a rapid pace, mostly from the start-up stage.

Hands on approach : Venture Capital institutions take active part in providing value-added services such as
providing business skills to investee firms. They do not interfere in management of the firms nor do they acquire a
majority/controlling interest in the investee firms. The rationale for the extension of hands-on management is that
Venture Capital investments tend to be highly non-liquid.

High risk return venture : Venture Capitalists finance high risk-return ventures .Some of the ventures yield very
high return in order to compensate for the high risks related lto the ventures. Venture Capitalists usually make huge
capital gains at the time of exit.
Nature of firms :Venture Capitalists usually finance small and medium-sized firms during the early stages of their
development, until they are established and are able to raise finance from the conventional industrial finance market. Many of
these firms are new, high technology-oriented companies.

Liquidity : Liquidity of Venture Capital investment depends on the success or other wise of the new venture or
product. Accordingly, there will be higher liquidity where the new ventures are highly successful.

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2.5 RECOMMENDATION

Multiplicity of Regulations - need for harmonization and nodal Regulator :

Presently there are three set of Regulations dealing with venture capital activity i.e. SEBI (Venture Capital
Regulations) 2016, Guidelines for Overseas Venture Capital Investments issued by Department of Economic
Affairs in the MOF in the year 2017 and CBDT Guidelines for Venture Capital Companies in 1995 which was
modified in 1999. The need is to consolidate and substitute all these with one single regulation of SEBI to provide
for uniformity, hassle free single window clearance. There is already a pattern available in this regard; the mutual
funds have only one set of regulations and once a mutual fund is registered with SEBI, the tax exemption by CBDT
and inflow of funds from abroad is available automatically. Similarly, in the case of Flls, tax benefits and foreign
inflows/outflows are automatically available once these entities are registered with SE

Tax passes through for venture capital funds :

VCFs are a dedicated pool of capital and therefore operate in fiscal neutrality and are treated as pass through
vehicles. In any case, the investors of VCFs are subjected to tax. Similarly, the investee companies pay taxes on
their earnings. Gh. Once registered with SEBI, it should be entitled to automatic tax pass through at the pool level
while maintaining taxation at the investor level without any other requirement under Income Tax Act.

Mobilization of global and domestic resources :

Foreign venture capital investors :

Presently, Flls registered with SEBI can freely invest and disinvest without taking FIPB/RBI approvals. This has
brought positive investments of more than US SIO billion. At present, foreign venture capital investors can make
direct investment in venture capital undertakings or through a domestic venture capital fund by taking FIPB / RBI
approvals.

Global integration and opportunities :

Incentive for employees :

The limits for overseas investment by Indian Resident Employees under the Employee Stock Option Scheme in a
foreign company should be raised from present ceilings of US$ 10,000 over 5 years, and US$50,000 over 5 years
for employees of software companies in their ADRs/GDRs, to a common ceiling of US$ 100,000 over 5 years.
Foreign employees of an Indian company may invest in the Indian company to a ceiling of US$ 100,000 over 5
years.

Incentive for shareholders :

The shareholders of an Indian company that has venture capital funding and is desirous of swapping its shares with
that of a foreign company should be permitted to do so. Similarly, if an Indian company having venture funding and
is desirous of issuing an ADR/GDR, venture capital shareholders (holding saleable stock) of the domestic company
and desirous of disinvesting their shares through the ADR/GDR should be permitted to do so. Internationally, 70%
of successful startups are acquired through a stock-swap transaction rather than being purchased for cash or going
public through an IPO.

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Infrastructure and Research and development :

Infrastructure development needs to be prioritized using government support and private management of capital
through programmers similar to the Small Business Investment Companies in the United States, promoting
incubators and increasing university and research laboratory linkages with venture-financed startup firms. This
would spur technological innovation and faster conversion of research into commercial products.

Self Regulatory Organization (SRO) :

A strong SRO should be encouraged for evolution of standard practices, code of

Conduct, creating awareness by dissemination of information about the industry.
Implementation of these recommendations would lead to creation of an enabling regulatory and institutional environment to
facilitate faster growth of venture.

2.6 SAMPLING :

A sampling plan basically entails the sample selection criteria, sampling unit, sampling technique, sample size,
element and respondent definition for the survey.

A For studying the venture capital investment process by Indian venture capitalist ( supply side )

The database of 163 venture capital firms was complied for this study. Jn order to assemble this database, the first
and the obvious choice was to look for the members of Indian Venture Capital Association (IVCA). First, it
included a few set of actors that may not be classified as venture capital firms. Second, the association did not have
some VC firms as members.

The list was then expanded by including VC firms found in a number of other sources namely Indian School of
Business (ISB), list of VC firms compiled by National Entrepreneurship Network (NEN) in India and various
newspaper articles that frequently report about the new investments happening in India.

Sample size :

The sample size of my project is limited to 100 people only. Out of which only 96 people had invested in venture capital fund.
Other 4 people did not have invested in venture capital fund.

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2.7 LIMITATIONS OF PROJECT
A study of this type cannot be without limitations. It has been observed those venture capitals are very secretive
about their investments. This attitude is a major hindrance for data collection. However venture capital
funds/companies that are members of Indian venture capital association are to be included in the study.

ADVANTAGES :

Business expertise. Aside from the financial backing, obtaining venture capital financing can provide a start-up or young
business with a valuable source of guidance and consultation. This can help with a variety of business decisions, including
financial management and human resource management. Making better decisions in these key areas can be vitally important as
your business grows. 

DISADVANTAGES :

Additional resources in a number of critical areas including legal tax and personal matters ABC form can provide active
support all the more important at a key step in the growth of a young company faster growth and greater access to potential q
benefits connection venture capitalist are typically when connected in the business community tapping into this condition could
have tremendous benefits

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2.8 SOPE OF THE PROJECT

The scope of the research include all types of venture capital firms set up as a company and firm is respect to of the
fact that they are registered with SEBI of India are not part of this study 

SCOPE OF VENTURE CAPITAL

Development of an idea seed capital :

In this initial state capital list provide shade capital for translating an idea into business proposition at this stage investigation is
made in Delft which normally takes a year or more 

Implementation stage start up finance :

When the form is set up to manufacture a product or provide a service start of finance provided by the venture capitalist.

Fledgling stage additional finance :

The firm has made headway and enter the stage of manufacturing a product but faces teething problems

Establishment stage establishment finance :

At this stage the firm is established in the market and exppected to expand at rapid pace.

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 CHAPTER 3
INDUSTRY PROFILE

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 CHAPTER 3 : INDUSTRY PROFILE

3.1 VC INDUSTRY PROFILE IN INDIA

4
India currently has more than about 400 Venture capital firms.

The Venture Capital industry has shown a exponential upward curve from investments of

about USD 0.5 billion (56 deals) in 2003 to USD 14 billion (439 deals) in 2007. In the year 2008, there
was a decline to about USD 11 billion (382 deals).

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 2009 Venture cvapital firms
are now interested in nearly all sectors.

With developing Indian entrepreneurship standards, government support , policies and globalisation
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 totalling almost US $6 billion in 2007, followed by Delhi/NCR with 63 investments (US
$2.7 billion) and Bangalore with 49 investments aggregating US $700 million.
4
“Microsoft Word - The VC Handbook -- _Chapter 0-26_ - PVI.A02_Venture.Capital.Industry.in.India.pdf,” accessed March
16, 2013, http://smoothridetoventurecapital.com/PVI.A02_Venture.Capital.Industry.in.India.pdf.

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3.2 TO THE VENTURE CAPITAL INDUSTRY

Initiative in India:

Indian tradition of venture capital for industry starts with a history of more than 150 years. Back then
many of the managing agency houses acted as venture capitalists providing both finance and
management skill to risky projects. It was the managing agency system through which Tata iron and
Steel and Empress Mills were able to raise equity from the investing public. The Tata’s also initiated a
managing agency system, named Investment Corporation of India in 1937, which by acting as venture
capitalists, successfully provided hi-tech enterprises such as CEAT tyres, associated bearings, national
rayon etc. The early form of venture capital enabled the entrepreneurs to raise large amount of funds and
yet retain management control. After the abolition of managing agency system, public sector term
lending institutions met a part of venture capital requirements through seed capital and risk capital for hi-
tech industries which were not able to meet promoter’s contribution. However all these institutions
supported only proven and sound technology while technology development remained largely confident
to government labs and academic institutions.

Many hi-tech industries, thus found it impossible to obtain financial assistance from banks and other
financial institutions due to unproven technology, conservative attitude, risk awareness and rigid
security parameters. Venture capitals growth in India passed through various stages. In 1973, R.S. Bhatt
committee recommended formation of Rs. 100 crore venture capital funds. The seventh five year plan
emphasized the need for developing a system of funding venture capital. The Research and
Development Cess Act was enacted in May 1986, which introduced a cess of 5 percent on all payments
made for purchases of technology from abroad. The levy provides the source for the venture capital
fund. Formalized venture capital took roots when comptroller of capital issues venture capital guidelines
in Nov 1988.5

5
“VENTURE CAPITAL - ManagementParadise.com Forums - Your MBA Online Degree Program and Management
Students Forum for MBA,BMS, MMS, BMM, BBA, Students & Aspirants.,” accessed March 30, 2013,
http://www.managementparadise.com/forums/miscellaneous-project-reports/11182-venture-capital.html.

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3.3 OF VENTURE CAPITAL INDUSTRY

Up to 1996: The Early Years:

 Funds that were mobilized for venture investment were small in value.
 The venture capitalists in those times were mostly from a banking background.
 Banks approached the subject of venture funding much likely they approached debt financing of
a project.
 The accent was on the asset-side of the balance sheet. And the focus on innovation and business
building was low.
 Value creation as a focus had not yet been fully discovered, and exit strategies were being
thought more around the life-term of the fund.
 Valuations were low.
 No competition between VCs.
 Indian entrepreneurs had not yet discovered the venture capital route to funding and growth and
it reflected in the small amounts that were invested.
 There was little or no active participation of venture capitalists in entrepreneurial activities such
as financial structuring, business strategy.
 Business enhancement through networks.

1997 to 2000: The Rock ‘n’ Roll Years:

 The SEBI guidelines of 1996 acted as huge incentive for institutional

acked MNC venture capital companies to focus their attention on India.
 The range of venture capitalists now spanned incubators, ingents, classic venture capitalists and
even private equity players. And the lines between them had begun to blur.
 Venture capitalists were instrumental in introducing risk taking too many, members of the
professional class.
 Innovation was the key, and idea flows equaled doer flows at a frantic pace never before seen.
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2001 Onwards: The Reality Years:

 The number of people who had got in to venture capital game was truly impressive.
 In addition to the seasoned players, there were finance and noon finance professionals of
different hues entering the industry and people with little or no experience running the
companies.
 Venture capital community is finally recognizing that the evolution and business is an on-going
process. This added to the return of the business maturation cycle of five to seven years, portends
a less frenetic and more sustained pace of venture activity.

3.4 THE VCs IN THE INDIAN CONTEXT:

One can ask why venture funding is so successful in USA but faced a number of problems in India. The
biggest problem was a mind set change from ‘collateral funding’ to high risk high return funding. Most
of the pioneers in the industry were people with credit background and exposure to manufacturing
industries. Exposure to fast growing intellectual property business and services sector was almost zero.
All combined to a slow start to the industry. The other issue that led to such a situation includes:

3.5 RAJ AND THE IPO BOOM:

Till early 1990s, under the license raj regime, only commodity centric businesses thrived in a deficit
situation.

To fund a cement plant, venture capital is not needed. What was needed was ability to get a license, and
then get the project funded by the banks and DFIs. In most cases, the promoters were well established
industrial houses, with no apparent need for funds. Most of these entities were capable of raising funds
from conventional sources, including term loans from institutional and equity markets.

Page | 29
3.3 SCALABILITY:

The Indian software segment has recorded an impressive growth over the last few years and earns large
revenues from its export earnings, yet our share in the global market is less than 1 per cent. Within the
software industry the value chain ranges from body shopping at the bottom to strategic consulting at the
top. Higher value addition and profitability as well as significant market presence take place at the
higher end of the value chain. If the industry has to grow further and survive the flux it would only be
through innovation. For any venture idea to succeed there should be a product that has a growing market
with a scalable business model. The IT industry (which is most suited for venture funding because of its
ideas nature) in India till recently had a service centric business model. Products developed for Indian
markets lack scale.

3.7 MINDSETS

Venture capital as an activity was virtually non existence in India. Most venture capital companies went
to provide capital on a secured debt basis, to established businesses with profitable operating histories.
Most of the venture capital units were off-shoots of financial institutions and banks and the lending
mindset continued. True venture capital is capital that is used to help launch products and ideas of
tomorrow. Abroad, this problem is solved by the presence of angel investors. They are typically wealthy
individuals who not only provide venture finance but also help entrepreneurs to shape their business and
make their venture successful.6

6
“Legal - Venture Capital-overview.pdf,” accessed March 30, 2013,
http://ganga.iiml.ac.in/~mishra/Test/mfsmakg/vcapital/Venture%20Capital-overview.pdf.
Page | 30
 3.8TAXES AND REGULATIONS:

There is a multiplicity of regulators like SEBI and RBI. Domestic venture funds are set up under the
Indian Trusts Act of 1882 as per SEBI guidelines, while offshore funds routed through Mauritius follow
RBI guidelines. Abroad, such funds are made under the Limited Partnership Act, which brings
advantages in the terms of taxation. The government must allow pension funds and insurance companies
to invest in venture capitals as in USA where corporate contributors to venture funds are large.

3.9 EXIT:

The exit routes available to the venture capitalists were restricted to the IPO route. Before deregulation,
pricing was dependent on the erstwhile CCI regulations. In general all issues were under period. Even
now SEBI guidelines make it difficult for pricing issues for an easy exit. Given the failure if the OTCEI
and the revised guidelines, small companies could not hope for a BSE / NSE listing. Given the dull
market for mergers and acquisitions, strategic sale was also not available.

3.10 VALUATION:

The recent phenomenon is valuation mismatches. Thanks to the software boom, most promoters have
sky high valuation expectations. Given this, it is difficult for deals to reach financial closure as
promoters do not agree to a valuation. This coupled with the fancy for software stocks in the bourses
means that most companies are proponing their IPOs. Consequently, the number and quality of deals
available to the venture funds gets reduced.7

7
“VENTURE CAPITAL - ManagementParadise.com Forums - Your MBA Online Degree Program and Management
Students Forum for MBA,BMS, MMS, BMM, BBA, Students & Aspirants.”
Page | 31
3.11 CONTRIBUTORS TO THE VENTURE FUND:

3.11.1 Foreign Institutional Investors.

3.11.2 All India Financial Institutions.
3.11.3 Multilateral Dev Agencies.
3.11.4 Other Banks.
3.11.5 Other Public.
3.11.6 Private Sector.
3.11.7 Public Sector.
3.11.8 Nationalized Banks.
3.11.9 State Financial Institutions.
3.11.10Insurance Companies.
3.11.11Mutual Funds.

Page | 32
 CHAPTER 4
COMPANY PROFILE

Page | 33
 CHAPTER 4 : COMPANY PROFILE

4.1 OVERVIEW

Funding Solutions is a boutique investment advisory firms offering services in preparing business plans
to raising capital resources for companies in Bangalore, Founded on February 17, 2012 with branches
across Bangalore and head office located in Jayanagar Bangalore. The company has a well-qualified and
experienced management team with ex bankers and other finance professionals to help entrepreneurs
with raising capital through

a. Private Equity

b. Venture capital

c. Angel Investments

d. Crowd Funding

e. Structured Finance through Debt and Equity capital

The company has a wide client base, and a huge network among all venture capital firms and young
business firms

They also support clients with business consulting and business finance

Page | 34
4.2 OBJECTIVE OF THE STUDY

We shall discuss here these following requirements by a VC firm that helps them judge the right venture
they wish to invest in.

 Investment Teaser : Executive summary

It holds the summary of the business plan and is a smart persuasive, yet realistic. Its a two
page of your business plan holding the venture idea and covering all its key elements.

 Investor Memorandum : covering aspects as shown below

➢ Background of venture
The parent company profile for the VC to be sure of the brand strength

➢ Product services offered

This part should cover all details of the product or service offered from its competitive
edge, USP to the development stages for even a non-specialist to understand. This should
also hold details of patents, or any other legal protection pending or required.

➢ Market analysis
The plan should describe about the market traction towards your venture’s services and
products, It should be strong enough to convince the VC firm to seek a real commercial
opportunity in your business.
 Size of the market
 Competitor
 How developed is the market
 Strategic Positioning

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  Strength and weaknesses if any
 Projections for company and the market

➢ Marketing and Business operations

 The marketing aspect i.e
o Sales and distribution strategy
o Strategies for different sales force
o Pricing strategy
o Promotions
 The operations aspects
o Suppliers
o Labour requirements
o Logistics and other daily working resources

➢ Management team
 Quality and depth in the management team
 Strong records of being involved with successful businesses

➢ Exit plan
The routes available for the VC to exit the investment and make a return.
 Floating on a stock exchange
 Selling the share to other trade buyer

➢ Funds required
A clear statement of how much funds are required with its source. The purpose for the
funding required with its clear break up for the VC to understand and analyse

Page | 36
 Financial projections

Ratios that describe all important business financial status for last 5 to 6 years, the capital allocation,
cash flow statements, profit n Loss statements, Balance sheets, cost analysis and yearly graphical
presentations for the expenses and earnings forecasted in for the coming years with this new venture.

This holds the most important part and will be examined again with few examples later in our study .The
Financial should produce a pro forma profit n loss statement and balance sheet and ensure that these are
realistic and could be updated or adjusted if need arises. It should also hold the company’s present
financial outlook that shows their margin and earning stability. It should forecast the prospective future
margins keeping the competition in mind.

 Company growth prospect

 Debt to Shareholder fund ratio
 Budgets allocated to each units

And to prove the consistency of the company of meeting the financial projections
relevant historical financials should be presented.

Page | 37
The second objective is to find the factors that are most crucial and are taken into consideration by a
venture capitalist for providing capital to a new company. We focus on a few sets of predefined factors.
The process to find these factors is necessary to understand as to how to implement these into the
documentation in proper manner so that the venture capitalist seeks the right interest for the proposed
venture.

We here will measure the factors

 Business Idea
 Financials
 Management
 IRR Conditions
 Pay Back period

Page | 38
4.3 VENTURE CAPITAL WORKING

STAGES OF FINANCING:
Stages of Financing Time(Years) Uses for the Finance

Financing needed to prove an idea and bring a

concept or develop it (could be a service or a

Seed money stage 7 – 10
product)

Financing needed to develop the start up with

better market penetration through promotions

Start-up financing 5 – 10
marketing and other product development

technique

Funds for taking care of working capital for a

firm, that is still losing money though have its

Second round financing 3–7
products or services out in market.

Financing for a firm that is breaking even and

has a strong venture thereby is contemplating

Third round financing 1–3
an expansion project.

Financing firms that are planning to go public,

(bridge financing).
Fourth round financing 1–3

1–3 Financing a firm for its acquisition activity of a

product line or service business.

Buy-out

Turnaround 3–5 Re-establishing a business

Page | 39
  STAGES IN VENTURE FINANCING :

Early Stage Financing:

 Seed financing for supporting a concept or idea.

 Research and Development financing for product development.

 Start-up capital for initiating operations and develop a prototypes.

 First stage financing for production and marketing.

Expansion Financing:

 Second stage financing for working capital and initial expansion.

 Development financing for major expansion.

 Bridge or mezzanine financing for facilitating public issue.

Acquisition/Buy-out Financing:

 Acquisition financing for acquiring another firm for further growth

 Management Buy-out financing for enabling operating group to acquire the firm or part of its

business.

 Turnaround financing.

Page | 40
4.4 ADVANTAGES OF VENTURE CAPITAL

 It injects long term equity finance which provides a solid capital base for future growth.

 The venture capitalist is a business partner, sharing both the risks and rewards. Venture

capitalists are rewarded by business success and the capital gain.

 The venture capitalist is able to provide practical advice and assistance to the company

based on past experience with other companies which were in similar situations.

 The venture capitalist also has a network of contacts in many areas that can add value to

the company, such as in recruiting key personnel, providing contacts in international

markets, introductions to strategic partners, and if needed co-investments with other

venture capital firms when additional rounds of financing are required.

 The venture capitalist may be capable of providing additional rounds of funding should it

be required to finance growth.

4.5 DISADVANTAGES OF GOING TO VENTURE CAPITAL FINANCE

 The agreement of funding is passed on a contract which could be partial ownership or other
profit sharing which if not properly negotiated by the entrepreneur he might lose ownership
of his whole business or idea and future to them.
 Intrusion and control : the VC gets the right to drive the firm thereby can take strategic
decision or can drive them to his advantage if the deal is not guided properly.

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4.6 VENTURE CAPITALISTS GENERALLY:

➢ Finance new and rapidly growing companies.

➢ Purchase equity securities.

➢ Assist in the development of new products or services.

➢ Add value to the company through active participation.

➢ Take higher risks with the expectation of higher rewards.

➢ Have a long term orientation.

When considering an investment, venture capitalists carefully screen the technical and business merits of
the proposed company. Venture capitalists only invest in a small percentage of the businesses they
review and have a long term perspective. They also actively work with company’s management,
especially with contacts and strategy formulation8.

Venture capitalists mitigate the risk of investing by developing a portfolio of young companies in a
single venture fund. Many times they co-invest with other professional venture capital firms. In addition,
many venture partnerships manage multiple funds simultaneously. For decades, venture capitalists have
nurtured the growth of America’s high technology and entrepreneurial communities resulting in
significant job creation, economic growth and international competitiveness. Companies such as Digital
Equipment Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel, Microsoft and
Genetic are famous examples of companies that received venture capital early in their development.

In India these funds are governed by the Securities and Exchange Board of India (SEBI) guidelines.
According to this venture capital fund means 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 investments in accordance with these regulations.

(Source: SEBI (Venture Capital Funds), Regulations, 1996).

8
“MomentumVC | About Venture Capital,” accessed March 30, 2013, http://www.momentumvc.com.au/docs/3100_f.htm.

Page | 42
4.7 FACTORS DETERMINING THE VENTURE CAPITAL REQUIREMENTS

 Nature of business: The requirements of working is very limited in public utility

undertakings such as electricity, water supply and railways because they offer cash
sale only and supply services not products, and no funds are tied up in inventories and
receivables. On the other hand the trading and financial firms requires less investment
in fixed assets but have to invest large amt. of working capital along with fixed
investments.
 Size of the business: Greater the size of the business, greater is the requirement of
working capital.
 Length of production cycle: The longer the manufacturing time the raw material and
other supplies have to be carried for a longer in the process with progressive
increment of labor and service costs before the final product is obtained. So working
capital is directly proportional to the length of the manufacturing process.
 Seasonal variations: Generally, during the busy season, a firm requires larger
working capital than in slack season.
 Working capital cycle: The speed with which the working cycle completes one cycle
determines the requirements of working capital. Longer the cycle larger is the
requirement of working capital.
 Business cycle: In period of boom, when the business is prosperous, there is need for
larger amt. of working capital due to rise in sales, rise in prices, optimistic expansion
of business, etc. On the contrary in time of depression, the business contracts, sales
decline, difficulties are faced in collection from debtor and the firm may have a large
amt. of working capital.

Page | 43
CHAPTER 5
PROJECT DESIGN AND
METHODOLOGY

Page | 44
 CHAPTER 5 : PROJECT DESING AND METHODOLOGY

5.1 TITLE OF THE PROJECT: - A study on factors effecting capital decisions by Venture
Capitalist

5.2 OBJECTIVES OF THE STUDY:-

 To understand about the process of Venture Capital Financing.

 To understand relevance of different factors effecting capital decisions
 To study the expected IRR by a VC
 To study the right method to reach to a potential VC with his preferred choice of documents.

5.3 SCOPE OF THE STUDY:-

The scope of the study was to put the theoretical aspect of the business plan study into real life work
experience by working with a investment banker. The data on preference of factors by venture capitalist
are analyzed through a survey method consisting of Small and Medium Enterprises.

5.4 METHODOLOGY :

Field study was carried out across different VC and capital seeking entrepreneurs, It was analysed
through SPSS (17) and Microsoft Office Excel 2007 Cross tabulation and chi-square statistics were
utilized to verify the interrelationships between the different respondents and the responses they
provided. To find the correlation among the factors Regression Analysis was also done. Pearson
correlation coefficient was found to be positive at a significance level over 0.5 which indicates a strong
correlation.

Page | 45
 5.5 DATA COLLECTION :

Primary sources includes survey with the a sample of 100 respondents is collected from Bangalore
region. The population is without any sectorial differentiation.

Secondary Sources were articles, journals, past records from Funding Solutionz, books and internet
sources.

RESEARCH DESIGN: - The research or study conducted at Funding Solutions is a des

c ri ptiv e research in nature. This design i s an at t emp t t o kn ow the preferred factors
considered by the venture capitalist before financing a firm..

LIMITATION OF THE STUDY:-

All the data presented for the study is for a small sample size only in Bangalore. The information
provided to the researcher may be over simplifications of facts over generalization from insufficient
data.
The study does not measure the qualitative aspects of the factors towards the dec is ion
making of a Venture Cap i t a l i s t . I t does not s how the skills , t echnical
know- how o f a VCs f inal de ci sion call

SAMPLING DESIGN

5.5.1.1 Sampling Unit:-Respondents include VCs and fund seeking entrepreneurs

5.5.1.2 Sampling Size:-100

TOOLS USED

MS-EXCEL and SPSS (17)

Page | 46
 5.6 : HOW TO REACH INVESTORS AND PREPARE DOCUMENTS AS PER

THEIR REQUIREMENT

The major issue though after knowing the important factors of decision making by a VCs remains the
same, how to reach them in a right manner with the documents they wish to study.

The current scenario of Venture Capital Firms show how critical it is to set the right documentation for
the analysis and processing of any new venture plan by a VC firm.

Through this experience I learned how to prepare the whole set of documents required by a VC as
defined below:

 Investment Teaser
 Business plan(Business idea, Market, Competitor Study, Financial and Marketing Plan, Exit Plan
etc)
 Information memorandum (a presentation having summary on all dimensions)
 Financial Plan

1. Investment Teaser:

This covers the necessary summary and aspects of the new venture proposed, topics like:

o Investment Summary
o About the Company
o The Need
o The current Gap
o The opportunity
o ROI and Sustainability
Page | 47
 o The Capability and the current state
o The Competition
o The USP
o The Revenue Model
o Funding Needs
o End note

2. Business plan :

This holds the whole information in a detailed manner regarding the venture plan, financials, its market
characteristics, and every details from the ownership to capital utilisation.

Such details are only inferred to the investor once they seek interest in the venture after having the view
at the investment teaser

3. Information Memorandum:

This is presentation the investee would show the investor, with clear details on the outline of all features
like the Venture Idea, Market analysis, Business model, Marketing plan, Financial Plan, Entrant barrier,
Management, Current services, Exit Plan, Risk Involved.

4. Financial Plan:

Ratios that describe all important business financial status for last 5 to 6 years, the capital allocation,
cash flow statements, profit n Loss statements, Balance sheets, cost analysis and yearly graphical
presentations for the expenses and earnings forecasted in for the coming years with this new venture.

Example shown in appendix

Page | 48
 CHAPTER 6
DATA ANALYSIS

Page | 49
 CHAPTER 6 : DATA ANALYSIS

6.1 : FACTORS EFFECTING THE CAPITAL DECISIONS

Descriptive Characteristics

The survey covers all factors with a scale of one to five.

One been the least and five been the maximum.

The survey is done to check the rank of factors effecting the decision making of an investor.
Here the respondents rank
 Business Idea
 Financials
 Management
 IRR Conditions
 Pay Back period

The result of the survey is as shown below for the given 100 respondents:

Table 5.1: Respondent Analysis

Scale Business Plan Financials Management IRR conditions Payback period

1 5 3 1 9 6

2 17 12 11 17 17

3 20 23 31 21 29

4 26 31 27 33 32

5 32 31 33 20 16

Page | 50
Statistical tools

Reliability Test
Cronbach’s alpha is the coefficient of reliability which shows how closely the items are related in the
group. The Cronbach's Alpha Value > .8 shows the responses are reliable. The Cronbach’s Alpha value
observed was 0.887 which is greater than 0.7 hence the variables for the study showed reliability.

Variables
The independent variables used here are Business plan, Financials, Management, IRR Conditions,
Payback period and dependent variable is Venture Capitalist financing decision

Hypothesis
H0: Business plan, Financials, Management, IRR Conditions, Payback period does not affect the
Venture Capitalist financing decision.
H1: Business plan, Financials, Management, IRR Conditions, Payback period does affect the Venture
Capitalist financing decision.

Confidence Interval
The confidence associated with an interval estimate is at 95%.

Decision Rule

Since Observed value is less than Critical value (at 95% confidence interval value alpha is .05)
Ho is rejected.
Hence the hypothesis is proved that the venture capital financing is dependent on the factors like
Business plan, Financials, Management, IRR Conditions, Payback period.

Page | 51
 TABLE 5.1.2 COMPONENT ANALYSIS

Initial Eigenvalues Extraction Sums of Squared Loadings

Compon
ent Total % of Variance Cumulative % Total % of Variance Cumulative %

1 3.899 77.986 77.986 3.899 77.986 77.986

2 .837 16.744 94.730

3 .212 4.250 98.980

4 .051 1.020 100.000

5 1.311E-16 2.622E-15 100.000

Extraction Method: Principal Component Analysis.

Factor Analysis
Factor analysis is a collection of methods used to examine how underlying constructs influence the
responses on a number of measured variables. Factor analyses are performed by examining the pattern
of correlations (or covariance’s) between the observed measures. Measures that are highly correlated
(either positively or negatively) are likely influenced by the same factors, while those that are relatively
uncorrelated are likely influenced by different factors. (Decoster, 1998)

TABLE 5.1.3 Communalities

Initial Extraction

Timeline 1.000 .691

Business idea 1.000 .566

Financials 1.000 .965

Management 1.000 .875

IRR 1.000 .803

Extraction Method: Principal Component Analysis.

Page | 52
Table 5.1.4 Component Matrix

Component

Timeline .831
Business plan .752

Financials .982

Management .935

IRR .896

Extraction Method: Principal

Component Analysis.

a. 1 components extracted.

Table 5.1.5: KMO and Bartlett's Test

Kaiser-Meyer- Olin Measure of 0 .624
Sampling Adequacy
Approx. Chi- 321.288
Bartlett's Test of Sphericity
Square
Df 28
Sig 0
Source: Primary Data

Decision Rule:
Barlett’s Test of sphericity tests the null hypothesis that the correlation matrix is an identity matrix
KMO should be greater than 0.6 in orders to reject null hypothesis. The results for KMO and Bartlett’s
Test showed that factor analysis was success.

Page | 53
Variables Used:
The variables used for the study are Business plan, Financials, Management, IRR Conditions, Payback
period. These variables were used to examine the pattern of correlations. Out of these 5 factors only 2
components were found to be highly correlated.

Decision Rule:
Based on the rotated component matrix two important variables were identified which are Financials,
Management. Chi-square testing was done to prove the main hypothesis using these three variables.

Conclusion: The advantage of using factor analysis is that it results in reduction of number of variables,
by combining two or more variables into a single factor but the limitation of this tool is its interpretation.
Factor analysis is a technique that requires a large sample size. Factor analysis is based on the
correlation matrix of the variables involved, and correlations usually need a large sample size before
they stabilize.

Page | 54
 Table

RANKING OF THE DOCUMENTS PREFERRED BY VENTURE CAPITALISTS

Documents Rank

Financials 1

Management 2

IRR method 3

List of project completion 4

CRITERIA FOR INVESTING IN START-UP COMPANIES:

The criteria for investing in start-up companies are based on the following factors.

 Nature of the venture team

 Project / Product / Service.

 Market characteristics.

 Financial consideration.

 Entrepreneurial and management experience.

Depending on the critical and analytical evaluation of the above mentioned factors, the decision as to

whether to accept or reject the project / proposal will be taken.

Page | 55
https://d.docs.live.net/4278f892a8a574eb/Documents/Document%20(11).docx

Chart-

RANKING OF THE DOCUMENTS PREFERRED BY VENTURE CAPITALIST

Factor Importance
1.2

0.8

0.6

0.4

0.2

0
Financials Management IRR Timeline

INTERPRETATION:

In the list of order of preference of required documents, the financials including previous year’s income
statement and forecasted cash flow occupies the first slot as more respondents gave it the first
preference.

Page | 56
Financials:

Financial plan is preferred by more respondents because it helps to evaluate how well do the firm utilise
the fund both for the investor and the consultant early a project will yield returns and based on that
investment decision are made.

Cash flow projection helps respondents to know how the funded cash will be utilized to give best
profitable returns. This helps to analyse the company’s ability to utilize the given funds for the optimum
results.

Balance Sheet, helps to evaluate company’s price earning ratio and debt coverage ratio in order to assess
whether the company is meeting external debts or not.

Management:

A strong leadership and an experience of past success venture projects gives venture capitalist an
assurance that they are investing money in the right firm and will be utilised for the right purpose.

IRR Conditions:

Internal rate of return and its share towards the investor further help him make a faster decision on a
venture project.He seeks his share of advantage and capital gain through his investment and would only
agree to go forwards if that is clear and also achievable for the timeline planned

Timeline:

A investor will like faster IRR and for that he requires a project with a shorter timeline with greater
revenues and profits. His decision making factors would thereby lie on the timeline feature of the
desired venture. If the timeline is defined well with achievable targets and acceptable risk conditions an
Investor will find it more comfortable in investing in such Venture ideas.

Page | 57
FINDINGS:

 Innovative nature of the project and its strong financial outlook with forecasted cash flow

statement and proper allocation stated well in the investor documentation becomes the

foremost amongst the major criteria in decision making.

 Entrepreneurial personality and experience, is given second importance by the respondents.

 IRR expected and one that can be achieved is given next importance after the entrepreneurial

personality and experience.

 Timeline, a most crucial decision making factor as it justifies the time for the ROI invested

by the venture capitalist.

 An International Market and market Characteristics criterion is given fifth position by the

respondent.

Page | 58
 Table

6.2 : VENTURE CAPITAL PREFERENCE – STAGE OF VENTURE

Stage Percentage %

Start-up 40

Seed Stage 30

Expansion 20

Turnaround 10

The venture capital preference can be divided in to the following category.

 Start-up

 Seed Capital

 Expansion

 Turnaround

FINDINGS:

Venture capital preference for start-up is more i.e. 40%.

Venture capital preference for seed stage is 30%.

Venture capital preference for expansion is 20%.

Venture capital preference for turnaround is 10%.

Page | 59
 Chart

: VENTURE CAPITAL PREFERENCE – STAGE OF VENTURE

Percentage %
45

40

35

30

25

20

15

10

0
Start-up Seed Stage Expansion Turnaround

Start-up Seed Stage Expansion Turnaround

INTERPRETATION:

Majority of venture capitalists in India and as observed from literature records on internet prefer
providing finance to start-ups with a seeding stage though providing finance involves high risks, but
never the less promises high returns.

Seed stage financing is difficult to execute as it involves great effort not for making the project take-off.
The management further also is responsible for constant monitoring and supporting the project.

Expansion and Turnaround stage covers 20% and 10% respectively, as at these stages conventional
finance is available and even there is a very limited exit option for venture capitalists.

Page | 60
 Table

6.3 IRR EXPECTATION BY VENTURE CAPITALISTS:

IRR Percentage%

20 – 25 40

25 – 30 20

Above 30 40

6.3 Chart

IRR EXPECTATION BY VENTURE CAPITALISTS:

Percentage%

Percentage%, 20 – 25
Above 30, 40, Percentage%,
40% 20 – 25, 40, 25 – 30
40% Above 30

Percentage%,
25 – 30, 20,
20%

Page | 61
INTERPRETATION: The percentage of the required minimum IRR preferences by venture capitalists
turns out to be more than that demanded by the banking companies or other financial firms backed by
banks due to several reason :

 Opportunity cost when compared is high by private firms is more.

 Exchange risk in financing and raising funds is more, country’s constraints and economic risk
faced by private venture capitalist is more.

Page | 62
 CHAPTER 7
FUNDING AND CONCLUSION

Page | 63
 CHAPTER 7 : FINDINGS & CONCLUSION

7.1 INTERPRETATION FOR FACTORS PREFFERED BY VC BEFORE

INVESTING IN A VENTURE:

 An innovative project is essential but within realistic and logical area, venture capitalists seeks
any project which promises immense growth potential and competitive ability to succeed and
sustain in the market.

 Entrepreneurial personality, experience and his management team contribute towards the
execution and success of the project, since they utilise the VC’s fund the venture capitalist make
sure of their major role with managing, working, guiding and co-coordinating the team towards
the right path.

 International markets for the project also assumes importance in the present situation where no
barriers exits for entry all can complete in one place and the success of the

 Project depends on facing competition not just in the local market but also in the global market.

 Good Team work, the mantra for modern success stories in the market, holds good for venture
capital funding too.

 Market Characteristics covers the marketability of the product and the competition it faces from
other competitors. Returns in the short period depend on the market characteristics of the project-
hence it is importance as a major criterion in decision making for capital funding.

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 7.2 FINDING AND CONCLUSION:

7.2.1 Venture capital has become a part of the popular business in India. Venture capital has
also become synonymous with investing in high risk technology businesses, that could
be majorly IT and can spread across further domains like healthcare, agriculture etc.

7.2.2 The VC’s final decision on a proposed venture is based on many criteria and also it
differs from one to other. All seek one common thing the right and proper way of
documentation for them to analyse the projects faster and easily.

7.2.3 If the project is new, promising and has innovative features then VC’s seek to have more
interest and are ready to help with more amounts because of its wide market
characteristics and its ability to capture the market.

7.2.4 Many SME’s usually lack the right method and technique to approach the suitable
VC and thereby they seek consultants to seek funds in the startup stage through
financial institution.

7.2.5 SME firms in India believed that ownership of the company is compromised with the
price paid for VC funds

7.2.6 The preference for investing venture capital is given to start-up stage may be
because of innovativeness of the project and a good team. It is found that less
preferences is given for expansion and turnaround stage of the venture.

7.2.7 Due to the formal structure of the VC operation and more stringent evaluation process,
complete business plans are compulsory.
7.2.8 The Internal Rate of Return is more when risk is high. 40 percent of the people
don’t want to take high risk and hence they are satisfied with moderate returns of

Page | 65
20-25 percent. Only 20 percent of the people are taking risk expecting high returns.

Page | 66
7.2.9 The venture capital investment is made adequate on IT, Banking, Media and
construction but investment is inadequate in Telecom, Energy, Resorts and
Healthcare. For overall development adequate investments must be made in all the
sectors.

7.2.10 The money invested in late stage is more utilized as compared to any other stage. The
reason is, in late stage the firm will be well established, has good brand name and
loyal customers and hence the money invested is used to promote the product and is
fully utilized.

7.2.11 The risk is more in the early stage as the product is new to the market and requires
huge capital to promote the product. Similarly the risk is less in the late stage where
the firm is well established and risk of losses moderate in the growth stage.

7.2.12 Equity shares are much preferred since high returns can be earned. It also ensures active
participation in management and also ownership. Equity shares are preferred since no
fixed interest is given to shareholders; the dividend depends on the profit of the firm.
Preference shares are less preferred because a fixed amount is to be paid irrespective of
the condition of the firm.

Page | 67
CHAPTER 8
BIBLIOGRAPHY

Page | 68
 CHAPTER 8 : BIBLIOGRAPHY

“About Venture Capital (VC).” Accessed March 30, 2013.

http://indiavca.org/about-venture- capital-vc.html.

“Legal - Venture Capital-overview.pdf.” Accessed March 30, 2013.

http://ganga.iiml.ac.in/~mishra/Test/mfsmakg/vcapital/Venture%20Capital-
overview.pdf.

“Loughborough University Institutional Repository: Venture Capital Financing in

India: a Study of Venture Capitalist’s Valuation, Structuring, and Monitoring
Practices.” Accessed March 30, 2013.
https://dspace.lboro.ac.uk/dspace-jspui/handle/2134/6819.

“Microsoft Word - The VC Handbook -- _Chapter 0-26_ -

PVI.A02_Venture.Capital.Industry.in.India.pdf.” Accessed March 16, 2013.
http://smoothridetoventurecapital.com/PVI.A02_Venture.Capital.Industry.in.I
ndia.pdf.
“MomentumVC | About Venture Capital.” Accessed March
30, 2013.
http://www.momentumvc.com.au/docs/3100_f.htm.

“VENTURE CAPITAL - ManagementParadise.com Forums - Your MBA Online

Degree Program and Management Students Forum for MBA,BMS, MMS, BMM,
BBA, Students & Aspirants.” Accessed March 30, 2013.
http://www.managementparadise.com/forums/miscellaneous-project-reports/11182-
venture- capital.html.

“Venture Capitalist.” Accessed March 30, 2013. http://techaloo.com/venture-capitalist/.

Page | 69
CHAPTER 9
APPENDIX

Page | 70
 CHAPTER 9 APPENDIX

Investment Teaser
Information memorandum
Financial Plan

Page | 71
 INVESTMENT TEASER

New- ABC Services Company

Location: Bangalore, India

Investment Summary:

Our company is a one year old Technology Services firm with over 20+ member team and has acquired
few Fortune 500 companies as clients and have built a strong pipeline of prospects from across the
Globe which include USA and Europe. Company will be achieving revenue of US$ 500,000 during the
financial year 2012-13. We are now seeking US$ 5 Million investment to be used for Working capital.
Based on our projections the turnover of the company is expected to touch US$ 100 Million by 2017
proving a healthy return for the investors.

About the Company:

The Company is promoted by 2 Technology professionals with experience in the IT & ITe Technology
domain for over 20 years. The company is currently focusing on markets in USA, Europe, India and has
plans to operate from other countries as well. "Our company specializes in new-age services like Cloud
Computing, Enterprise Mobility, Enterprise Applications, Information Management and ITe Consulting."
using unique ITe methods”.

The Need:

Across the world, the business needs are changing faster compared to a decade ago due to shorter
product cycles, consumer behavior and more competition. Traditional waterfall model of IT delivery is
not suitable to support changing business anymore; IT has to support business in an 'ITe' way. ITe IT
means a new specialized way of software engineering that requires different skills and expertise

The current Gap:

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Indian vendors are struggling to support this demand for ITe (due to shortage of ITe skills and know-
how, difficulty to change the current factory models). Outsourced IT providers are asked by clients to
provide more value (time to market and better quality) as opposed to volume and cheap resources. These
days, at least one in 3 large RFPs is specifically demanding ITe delivery.

The opportunity:

Industries like Banking and Finance, Healthcare, Retail, Manufacturing, Telecom are shifting towards
ITe . Apart from the shift in the current market, a new market for ITe is also emerging due to emerging
trends like e-retail, e-governance, cloud and mobility. ITe is the way forward; Gartner predicts that in
the next few years, 80% of the IT will move to ITe. Current IT service companies are not geared up to
support this demand. There are no pure-play ITe IT providers from India. The size of the target market is
at least USD 40 billion by 2017. We are positioning ourselves as India's first pure-play ITe company,
offering ITe at large scale from offshore.

ROI and Sustainability:

The cost of an ITe developer in the west is twice than a regular developer. Customers are willing to pay
higher for this niche and scarce skill, so the ROI is higher. ITe is a unidirectional shift and a strong
sustainable delivery model for the future.

The Capability and the current state:

We have evangelized and transformed ITe delivery setup in the past for a large international Bank’s IT
in India, so we can establish this model in the Indian services industry as the new service benchmark.
We have started small-scale operations from India from October 2011 with a completely operational ITe
facility. We need to enter the ITe savvy target markets of US and Europe to exploit the strong demand.

The Competition:

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The only pure play competition is a US based company called ThoughtWorks owned 97% by an
individual. They have 23 offices in 9 countries with a workforce of less than 2000 people making
revenue more than USD 250 million. The success of the model clearly shows that there is a good
demand for the service willing to pay above the market rates.

The USP:

We have already marketed and positioned ourselves to be the leading 'ITe thought leaders' from India
(popularity on social and professional networking sites). We will give a face-lift to the Indian IT
outsourcing scene by providing high-end business value through ‘ITe’. A new entrant would require
similar ITe image, thought leadership and subject matter expertise, and large scale ITe implementation
background to enter this arena.

The Revenue Model:

Our business model is a mix of ITe consulting and ITe delivery. In this short time, we have managed to
attract some known names like Fidelity, Barclays, HP, Monsanto etc. among others with very minimal
investments on sales. We have open pipeline on clients like Goldman Sachs, GE Healthcare, RBS, PwC,
FirstData etc. that need to convert and needs more investment on account management and sales.

Funding Needs:

We need funding of USD 5 million to invest in establishing offices in the US and Europe, setup strong
sales team, strengthening the management structure and board of directors, setup ITe infrastructure and
to groom ITe skills from the market through the ITe university model.

Our target is to reach minimum revenue of USD 101 million by 2017 which would be a faction (0.05%)
of the projected ITe market.

End note:

We have a full business plan available on request. We are very passionate about our business and we
would invite any interested investors to contact our Advisors now to discuss this investment proposal
further with us now.

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Financial Plans

Financial Plan

Start-up Funding
Table: Start-up Funding
Start-up Funding
Start-up Expenses to Fund R2,000,000
Start-up Assets to Fund R115,000,000
Total Funding Required R117,000,000

Assets
Non-cash Assets from Start-up R75,000,000
Cash Requirements from Start-up R40,000,000
Additional Cash Raised R23,000,000
Cash Balance on Starting Date R63,000,000
Total Assets R138,000,000

Liabilities and Capital

Liabilities
Current Borrowing R0
Long-term Liabilities R0
Accounts Payable (Outstanding Bills) R0
Other Current Liabilities (interest-free) R0
Total Liabilities R0

Capital

Planned Investment
Owner R0
Investor R140,000,000
Additional Investment Requirement R0
Total Planned Investment R140,000,000

Loss at Start-up (Start-up Expenses) (R2,000,000)

Total Capital R138,000,000

Total Capital and Liabilities R138,000,000

Total Funding R140,000,000

Page | 75
Break-even Analysis

Table: Break-even Analysis

Break-even Analysis

Monthly Units Break-even 1,178

Monthly Revenue Break-even R10,363,636

Assumptions:
Average Per-Unit Revenue R8,800.00
Average Per-Unit Variable Cost R3,960.00
Estimated Monthly Fixed Cost R5,700,000

Chart: Break-even Analysis

Page | 76
Projected Profit and Loss

Table: Profit and Loss

Pro Forma Profit and

Loss
Year 1 Year 2 Year 3 Year 4 Year 5
Sales R88,000,000 R273,000,000 R665,000,000 R832,500,000 R1,080,000,000

Direct Cost of Sales R39,600,000 R122,850,000 R299,250,000 R374,625,000 R486,000,000

Other Costs of Sales R1,800,000 R5,460,000 R13,300,000 R16,650,000 R21,600,000

Total Cost of Sales R41,400,000 R128,310,000 R312,550,000 R391,275,000 R507,600,000

Gross Margin R46,600,000 R144,690,000 R352,450,000 R441,225,000 R572,400,000

Gross Margin % 52.95% 53.00% 53.00% 53.00% 53.00%

Expenses
Payroll R34,800,000 R36,600,000 R38,700,000 R41,400,000 R44,200,000
Marketing/Promotion R30,000,000 R25,000,000 R25,000,000 R25,000,000 R30,000,000

Depreciation R0 R3,000,000 R3,000,000 R3,000,000 R3,000,000

Utilities R1,200,000 R1,400,000 R1,600,000 R1,800,000 R2,000,000
Insurance R1,200,000 R1,200,000 R1,200,000 R1,200,000 R1,200,000
Other R1,200,000 R1,500,000 R1,500,000 R1,800,000 R2,000,000

Total Operating R68,400,000 R68,700,000 R71,000,000 R74,200,000 R82,400,000

Expenses

Profit Before Interest (R21,800,000) R75,990,000 R281,450,000 R367,025,000 R490,000,000

and Taxes
EBITDA (R21,800,000) R78,990,000 R284,450,000 R370,025,000 R493,000,000

Interest Expense R0 R0 R0 R0 R0
Taxes Incurred R0 R22,797,000 R84,435,000 R110,107,500 R147,000,000

Net Profit (R21,800,000) R53,193,000 R197,015,000 R256,917,500 R343,000,000

Net Profit/Sales -24.77% 19.48% 29.63% 30.86% 31.76%

Page | 77
Chart: Profit Monthly

Chart: Profit Yearly

Page | 78
Page | 79
Chart: Gross Margin Monthly

Chart: Gross Margin Yearly

Page | 80
Page | 81
Projected Cash Flow

Table: Cash Flow

Pro Forma Cash Flow

Year 1 Year 2 Year 3 Year 4 Year 5
Cash Received

Cash from Operations

Cash Sales R88,000,000 R273,000,000 R665,000,000 R832,500,000 R1,080,000,000
Subtotal Cash from Operations R88,000,000 R273,000,000 R665,000,000 R832,500,000 R1,080,000,000

Additional Cash Received

Sales Tax, VAT, HST/GST R0 R0 R0 R0 R0
Received
New Current Borrowing R0 R0 R0 R0 R0
New Other Liabilities (interest- R0 R0 R0 R0 R0
free)
New Long-term Liabilities R0 R0 R0 R0 R0
Sales of Other Current Assets R0 R0 R0 R0 R0
Sales of Long-term Assets R0 R0 R0 R0 R0
New Investment Received R140,000,000 R0 R0 R0 R0
Subtotal Cash Received R228,000,000 R273,000,000 R665,000,000 R832,500,000 R1,080,000,000

Expenditures Year 1 Year 2 Year 3 Year 4 Year 5

Expenditures from Operations

Cash Spending R104,700,000 R302,185,551 R551,942,026 R507,593,281 R774,375,264
Bill Payments R0 R0 R0 R0 R0
Subtotal Spent on Operations R104,700,000 R302,185,551 R551,942,026 R507,593,281 R774,375,264

Additional Cash Spent

Sales Tax, VAT, HST/GST Paid R0 R0 R0 R0 R0
Out
Principal Repayment of Current R0 R0 R0 R0 R0
Borrowing
Other Liabilities Principal R0 R0 R0 R0 R0
Repayment
Long-term Liabilities Principal R0 R0 R0 R0 R0
Repayment
Purchase Other Current Assets R5,000,000 R2,500,000 R5,000,000 R5,000,000 R5,000,000
Purchase Long-term Assets R20,000,000 R0 R0 R0 R10,000,000
Dividends R0 R0 R0 R0 R0
Subtotal Cash Spent R129,700,000 R304,685,551 R556,942,026 R512,593,281 R789,375,264

Net Cash Flow R98,300,000 (R31,685,551) R108,057,974 R319,906,719 R290,624,736

Cash Balance R161,300,000 R129,614,449 R237,672,423 R557,579,142 R848,203,878

Page | 82
 Chart: Cash
Month 1

Month 2

Month 3

Month 4

Month 5

Month 6

Month 7

Month 8

Month 9

Month 10

Month 11

Month 12
Page | 59
Projected Balance Sheet

Table: Balance Sheet

Pro Forma Balance Sheet
Year 1 Year 2 Year 3 Year 4 Year 5
Assets

Current Assets
Cash R161,300,000 R129,614,449 R237,672,423 R557,579,142 R848,203,878
Inventory R9,900,000 R95,278,551 R182,235,577 R117,246,358 R157,621,622
Other Current Assets R5,000,000 R7,500,000 R12,500,000 R17,500,000 R22,500,000
Total Current Assets R176,200,000 R232,393,000 R432,408,000 R692,325,500 R1,028,325,500

Long-term Assets
Long-term Assets R80,000,000 R80,000,000 R80,000,000 R80,000,000 R90,000,000
Accumulated Depreciation R0 R3,000,000 R6,000,000 R9,000,000 R12,000,000
Total Long-term Assets R80,000,000 R77,000,000 R74,000,000 R71,000,000 R78,000,000
Total Assets R256,200,000 R309,393,000 R506,408,000 R763,325,500 R1,106,325,500

Liabilities and Capital Year 1 Year 2 Year 3 Year 4 Year 5

Current Liabilities
Accounts Payable R0 R0 R0 R0 R0
Current Borrowing R0 R0 R0 R0 R0
Other Current Liabilities R0 R0 R0 R0 R0
Subtotal Current Liabilities R0 R0 R0 R0 R0

Long-term Liabilities R0 R0 R0 R0 R0
Total Liabilities R0 R0 R0 R0 R0

Paid-in Capital R280,000,000 R280,000,000 R280,000,000 R280,000,000 R280,000,000

Retained Earnings (R2,000,000) (R23,800,000) R29,393,000 R226,408,000 R483,325,500
Earnings (R21,800,000) R53,193,000 R197,015,000 R256,917,500 R343,000,000
Total Capital R256,200,000 R309,393,000 R506,408,000 R763,325,500 R1,106,325,500
Total Liabilities and Capital R256,200,000 R309,393,000 R506,408,000 R763,325,500 R1,106,325,500

Net Worth R256,200,000 R309,393,000 R506,408,000 R763,325,500 R1,106,325,500

Business Ratios

Table: Ratios

Ratio Analysis
Year 1 Year 2 Year 3 Year 4 Year 5 Industry
Profile
Sales Growth n.a. 210.23% 143.59% 25.19% 29.73% 0.00%

Percent of Total Assets

Inventory 3.86% 30.80% 35.99% 15.36% 14.25% 0.00%
Other Current Assets 1.95% 2.42% 2.47% 2.29% 2.03% 100.00%
Total Current Assets 68.77% 75.11% 85.39% 90.70% 92.95% 100.00%
Long-term Assets 31.23% 24.89% 14.61% 9.30% 7.05% 0.00%
Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Current Liabilities 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Long-term Liabilities 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Liabilities 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Page | 60
Net Worth 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Gross Margin 52.95% 53.00% 53.00% 53.00% 53.00% 0.00%
Selling, General & 77.73% 33.52% 23.37% 22.14% 21.24% 0.00%
Administrative Expenses
Advertising Expenses 34.09% 9.16% 3.76% 3.00% 2.78% 0.00%
Profit Before Interest and -24.77% 27.84% 42.32% 44.09% 45.37% 0.00%
Taxes

Main Ratios
Current 0.00 0.00 0.00 0.00 0.00 0.00
Quick 0.00 0.00 0.00 0.00 0.00 0.00
Total Debt to Total Assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Pre-tax Return on Net Worth -8.51% 24.56% 55.58% 48.08% 44.29% 0.00%
Pre-tax Return on Assets -8.51% 24.56% 55.58% 48.08% 44.29% 0.00%

Additional Ratios Year 1 Year 2 Year 3 Year 4 Year 5

Net Profit Margin -24.77% 19.48% 29.63% 30.86% 31.76% n.a
Return on Equity -8.51% 17.19% 38.90% 33.66% 31.00% n.a

Activity Ratios
Inventory Turnover 4.00 2.34 2.16 2.50 3.54 n.a
Accounts Payable Turnover 0.00 0.00 0.00 0.00 0.00 n.a
Payment Days 0 0 0 0 0 n.a
Total Asset Turnover 0.34 0.88 1.31 1.09 0.98 n.a

Debt Ratios
Debt to Net Worth 0.00 0.00 0.00 0.00 0.00 n.a
Current Liab. to Liab. 0.00 0.00 0.00 0.00 0.00 n.a

Liquidity Ratios
Net Working Capital R176,200,000 R232,393,000 R432,408,000 R692,325,500 R1,028,325,500 n.a
Interest Coverage 0.00 0.00 0.00 0.00 0.00 n.a

Additional Ratios
Assets to Sales 2.91 1.13 0.76 0.92 1.02 n.a
Current Debt/Total Assets 0% 0% 0% 0% 0% n.a
Acid Test 0.00 0.00 0.00 0.00 0.00 n.a
Sales/Net Worth 0.34 0.88 1.31 1.09 0.98 n.a
Dividend Payout 0.00 0.00 0.00 0.00 0.00 n.a

Page | 61
Use of Funds

Table: Use of Funds

Use of Funds

Use Amount
Office Furnitures R5,000,000
Technology set up/Servers/Web etc R20,000,000
Printing R15,000,000
Marketing R30,000,000
Building Construction R20,000,000
Working capital R40,000,000
R&D R10,000,000
Total R140,000,000

Page | 62
 QUESTIONNAIRE

Q.1 research and development activity in Indian pharmaceutical

company have increased since 2015 patent act.

A) Yes
B) No

Q.2 research and development activity plays major role in

survival of pharmaceutical company.

A) Yes
B) No
Q.3 Generally …….% after 10 hour share for research and
development activity.

A) Yes
B) No
Q.4 If outsourced to whom
A) Small scale
B) Medium scale
C) Large scale

Q.5 patent has adverse effect on availability for common man.

A) High
B) Moderate
C) Low
Page | 1