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Total Number of Subscribers: 426 |
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Date: 1 May 2008 |
Compiled by Mr. M. Sathya Kumar |
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TheVenture Capital
Funds in This paper proposes to outline the concept and origin of Venture
Capital, trace its growth, and highlight the venture capital regulations. It
has briefly explained about the Chandra Sekhar Committee recommendations,
various types of Venture Capital Funds and the venture capital process in Introduction The venture capital investment helps for the growth of
innovative entrepreneurships in The concept of Venture Capital Venture capital means many things to many people. It is in fact
nearly impossible to come across one single definition of the concept. Jane Koloski Morris, editor of the well known industry
publication, Venture Economics, defines venture capital as 'providing seed,
start-up and first stage financing' and also 'funding the expansion of
companies that have already demonstrated their business potential but do not
yet have access to the public securities market or to credit oriented
institutional funding sources. The European Venture Capital Association describes it as
risk finance for entrepreneurial growth oriented companies. It is investment
for the medium or long term return seeking to maximize medium or long term
for both parties. It is a partnership with the entrepreneur in which the
investor can add value to the company because of his knowledge, experience
and contact base. The Origin of Venture Capital In the 1920's & 30's, the wealthy families of and
individuals investors provided the start up money for companies that would
later become famous. Eastern Airlines and Xerox are the more famous ventures
they financed. Among the early VC funds set up was the one by the Rockfeller
Family which started a special fund called VENROCK in 1950, to finance new
technology companies. General Doriot, a professor at Venture Capital in In The venture capital investment in Chart I Venture Capital Investments
Source: The Economic Times SEBI Venture Capital Funds (VCFs) Regulations, 1996 A Venture Capital Fund means a fund established
in the form of a trust/company; including a body corporate, and registered
with SEBI which (i) has a dedicated pool of capital raised in a manner
specified in the regulations and (ii) invests in venture capital undertakings
(VCUs) in accordance with these regulations. A Venture Capital Undertaking means a domestic company (i) whose shares are not listed on a
recognised stock exchange in India and (ii) which is engaged in the business
of providing services/production/manufacture of articles/things but does not
include such activities/sectors as are specified in the negative list by SEBI
with government approval-namely, real estate, non-banking financial companies
(NBFCs), gold financing, activities not permitted under the industrial policy
of the Government and any other activity which may be specified by SEBI in
consultation with the Government from time to time. Registration All VCFs must be registered with SEBI and pay Rs.25,000 as
application fee and Rs. 5,00,000 as registration fee for grant of
certificate. Recommendations of SEBI (Chandrasekhar) Committee, 2000 SEBI appointed the
Chandrasekhar Committee to identify the impediments in the growth of venture
capital industry in the country and suggest suitable measures for its rapid
growth. Its report was submitted in January, 2000. The recommendations
pertain to Types of Venture Capital Funds Generally there are three types of organised or institutional
venture capital funds: venture capital funds set up by angel investors, that
is, high net worth individual investors; venture capital subsidiaries of corporations
and private venture capital firms/ funds. Venture capital subsidiaries are
established by major corporations, commercial bank holding companies and
other financial institutions. Venture funds in 1 . VCFs promoted by the Central govt. controlled development
financial institutions such as TDICI, by ICICI, Risk capital and
Technology Finance Corporation Limited (RCTFC) by the Industrial Finance
Corporation of India (IFCI) and Risk Capital Fund by IDBI. 2. VCFs promoted by the state government-controlled
development finance institutions such as Andhra Pradesh Venture Capital
Limited (APVCL) by Andhra Pradesh State Finance Corporation (APSFC) and
Gujarat Venture Finance Company Limited (GVCFL) by Gujarat Industrial
Investment Corporation (GIIC) 3. VCFs promoted by Public Sector banks such as Canfina
by Canara Bank and SBI-Cap by State Bank of 4. VCFs promoted by the foreign banks or private sector
companies and financial institutions such as Indus Venture Fund, Credit
Capital Venture Fund and Grindlay's India Development Fund. The Venture Capital Investment Process: The venture capital activity is a
sequential process involving the following six steps.
Deal origination: In generating a deal flow, the VC investor creates a pipeline of
deals or investment opportunities that he would consider for investing in.
Deal may originate in various ways. referral system, active search system,
and intermediaries. Referral system is an important source of deals. Deals
may be referred to VCFs by their parent organisaions, trade partners,
industry associations, friends etc. Another deal flow is active search
through networks, trade fairs, conferences, seminars, foreign visits etc.
Intermediaries is used by venture capitalists in developed countries like Screening: VCFs, before going for an in-depth analysis, carry out initial
screening of all projects on the basis of some broad criteria. For example,
the screening process may limit projects to areas in which the venture
capitalist is familiar in terms of technology, or product, or market scope.
The size of investment, geographical location and stage of financing could
also be used as the broad screening criteria. Due Diligence: Due diligence is the industry jargon for all the activities that
are associated with evaluating an investment proposal. The venture
capitalists evaluate the quality of entrepreneur before appraising the
characteristics of the product, market or technology. Most venture
capitalists ask for a business plan to make an assessment of the possible
risk and return on the venture. Business plan contains detailed information
about the proposed venture. The evaluation of ventures by VCFs in Preliminary evaluation: The applicant required to provide a
brief profile of the proposed venture to establish prima facie eligibility. Detailed evaluation: Once the preliminary evaluation is over,
the proposal is evaluated in greater detail. VCFs in VCFs in Deal Structuring: In this process, the venture capitalist and the venture company
negotiate the terms of the deals, that is, the amount, form and price of the
investment. This process is termed as deal structuring. The agreement also
include the venture capitalist's right to control the venture company and to
change its management if needed, buyback arrangements, acquisition, making
initial public offerings (IPOs), etc. Earned out arrangements specify the
entrequreneur's equity share and the objectives to be achieved. Post Investment Activities: Once the deal has been structured and agreement finalised, the venture
capitalist generally assumes the role of a partner and collaborator. He also
gets involved in shaping of the direction of the venture. The degree of the
venture capitalist's involvement depends on his policy. It may not, however,
be desirable for a venture capitalist to get involved in the day-to-day
operation of the venture. If a financial or managerial crisis occurs, the
venture capitalist may intervene, and even install a new management team. Exit: Venture capitalists generally want to cash-out their gains in
five to ten years after the initial investment. They play a positive role in
directing the company towards particular exit routes. A venture may exit in
one of the following ways: Methods of Venture Financing Venture capital is typically available in three forms in Equity : All VCFs in Conditional Loan: It is repayable in the form of a royalty
after the venture is able to generate sales. No interest is paid on such
loans. In Income Note : It is a hybrid security which combines
the features of both conventional loan and conditional loan. The entrepreneur
has to pay both interest and royalty on sales, but at substantially low
rates. Other Financing Methods: A few venture
capitalists, particularly in the private sector, have started introducing
innovative financial securities like participating debentures, introduced by
TCFC is an example. A Case on Technology Development & Information
Company Of India Ltd. TDICI was incorporated in January 1988 with the support of the
ICICI and the UTI. The country's first venture fund managed by the TDICI
called VECAUS ( Venture Capital Units Scheme) was started with an initial
corpus of Rs.20 crore and was completely committed to 37 small and medium
enterprises. The first project of the TDICI was loan and equity to a computer
software company called Kale Consultants. Present Status: At present the TDICI is administering two UTI –mobilised funds under VECAUS-I and II, totaling Rs.120
crore. the Rs.20 crore invested under the first fund, VECAUS-I, has already
yielded returns totaling Rs. 16 crore to its investors. Some of the projects financed by the TDICI are discussed
below. MASTEK , a Mumbai based software firm, in which
the TDICI invested Rs.42 lakh in equity in 1989, went public just three years
later, in November 1992. It showed an annual growth of 70-80 percent in the
turnover. TEMPTATION FOODS, located in PUNE, which exports frozen
vegetables and fruits, went public in November 1992. The TDICI invested
Rs.50 lakh in its equity. RISHABH INSTRUMENTS of SYNERGY ART FOUNDATION, which runs art
galleries in Mumbai and Chennai and plans to set up in Pune and Conclusion In recent years the growth of Venture Capital Business has been
drastically decreasing due to many reasons. The regulator has to liberalize
the stringent policies and pave the way to the venture capital investors to
park their funds in most profitable ventures. Though an attempt was also made
to raise funds from the public and fund new ventures, the venture capitalists
had hardly any impact on the economic scenario for the next few years. At
present many investments of venture capitalists in Courtesy : D. Aruna Kumar |
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