VENTURE CAPITAL in india... with anaysis diffrent industry of invesment of last decade

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I. What Is Venture Capital?
Venture capital is money provided by an outside investor to finance a new, growing,
or troubled business. The venture capitalist provides the funding knowing that there's
a significant risk associated with the company's future profits and cash flow. Capital
is invested in exchange for an equity stake in the business rather than given as a loan,
and the investor hopes the investment will yield a better-than-average return.
Venture capital is an important source of funding for start-up and other companies
that have a limited operating history and don't have access to capital markets. A
venture capital firm (VC) typically looks for new and small businesses with a
perceived long-term growth potential that will result in a large payout for investors.
A venture capitalist is not necessarily just one wealthy financier. Most VCs are
limited partnerships that have a fund of pooled investment capital with which to
invest in a number of companies. They vary in size from firms that manage just a few
million dollars worth of investments to much larger VCs that may have billions of
dollars invested in companies all over the world. VCs may be a small group of
investors or an affiliate or subsidiary of a large commercial bank, investment bank, or
insurance company that makes investments on behalf clients of the parent company or
outside investors. In any case, the VC aims to use its business knowledge, experience
and expertise to fund and nurture companies that will yield a substantial return on the
VC's investment, generally within three to seven years.
Not all VC investments pay off. The failure rate can be quite high, and in fact,
anywhere from 20 percent to 90 percent of portfolio companies may fail to return on
the VC's investment. On the other hand, if a VC does well, a fund can offer returns of
300 to 1,000 percent.
In additional to a portion of the equity, a VC expects to have a say in how its portfolio
company operates. Ideally, the VC fosters growth at the company through its
involvement in managerial, strategic, and planning decisions. To do this, the VC relies
on the expertise of its general partners who may be former CEOs, bankers, or experts
in a particular industry. In most cases, one or more general partners of the VC take

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Board of Director positions at a portfolio company. They may also help recruit key
executives to the portfolio company.
It's important to do your homework before approaching a VC for funding, to make
sure you're targeting the right potential partner for your business needs. Not all VCs
invest in ‘start-ups.' While some may invest small amounts of “seed” capital for very
early ventures, many focus on early or expansion funding (see section III. Types of
Funding), while still others may invest at the end of the business cycle, specializing in
buyouts, turnarounds, or recapitalizations.
VCs may be generalists that invest in a variety of industries and locations. More
typically, they specialize in a particular industry. Make sure your company falls
within the VC's target industry before you make your pitch – a VC that's focused on
biotechnology start-ups will not consider your request for later-stage funding for
expansion of your semiconductor firm. You can often gain insight into a VC's
investment preferences by reviewing its website.
In addition to industry preferences, VCs also typically have a geographic preference.
Being in the same general location as a portfolio company allows the VC to better
assist with business operations such as marketing, personnel, and financing.
Keep in mind that venture capital is not an option for all new businesses. In fact, VCs
are very selective in choosing new companies to invest in, so your company may not
qualify. They're most interested in businesses with high growth potential that will
allow them to successfully exit with a higher than average return in a time frame of
roughly three to 10 years, depending on the type of investment. Given the rigorous
expectations, most venture funding goes to companies in rapidly expanding industries
such as technology, biotechnology, and life sciences.
There are some excellent alternatives to venture capital that you should also explore
in your search for funding sources. One such alternative is an angel investor – a term
for an investor that takes you under its wing and lifts you up to the next level of
growth. Angel investors typically do not have deep pockets so the average investment
tends to be smaller than that of a VC, typically hundreds of thousands of dollars rather
than millions. For that amount of capital, proceed with caution if you're considering

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giving up some control over your company. For instance, it may not be wise to give a
Board position to an angel investor who does not necessarily have the time,
experience or expertise to make a significant contribution to your company.
You might also consider a strategic investor partner in place of a VC investment. This
could be a vendor, customer, or other business partner with whom you're currently
working, who might be interested in investing in your company. A strategic investor
often has deeper pockets than an angel investor, but typically has a specific reason for
investing in your company – make sure you know the reason behind the investment.
The investor may only want to leverage your technology for its own purposes, which
could have a negative impact on your business. Or, the investor may want a licensing
distribution agreement if your company succeeds, which could benefit you. Make sure
your interests are aligned.
DEFINITION of'Venture Capital'
Money provided by investors to start-up firms and small businesses with perceived
long-term growth potential. This is a very important source of funding for start-ups
that do not have access to capital markets. It typically entails high risk for the
investor, but it has the potential for above-average returns.

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Venture capital can also include managerial and technical expertise. Most venture
capital comes from a group of wealthy investors, investment banks and other financial
institutions that pool such investments or partnerships. This form of raising capital is
popular among new companies or ventures with limited operating history, which
cannot raise funds by issuing debt. The downside for entrepreneurs is that venture
capitalists usually get a say in company decisions, in addition to a portion of the
equity.
History of venture capital in India
Historical Evolution
The development of the organised venture capital industry in India, as is in existence
today, was slow and belaboured, circumscribed by resource constraints resulting from
the overall framework of the socialistic economic paradigms. Although funding for
new businesses was available from banks and government owned development
financial institutions, it was provided as collateral-based money on project-financing
basis, which made it difficult for most new entrepreneurs, especially those who were
technology and services based, to raise money for their ideas and businesses. Most
entrepreneurs had to rely on their own financial resources, and those of their families
and well wishers or private financiers to realise their entrepreneurial dreams.
Early Beginnings
In 1972, a committee on Development of Small and Medium Enterprises highlighted
the need to foster venture capital as a source of funding new entrepreneurs and
technology. This resulted in a few incremental steps being taken over the next decade-
and-a-half to facilitate venture capital funds into needy technology oriented small and
medium Enterprises (SMEs), namely:
 Risk Capital Foundation, sponsored by IFCI, was set-up in 1975 to promote and
support new technologies and businesses.

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 Seed Capital Scheme and the National Equity Scheme was set up by IDBI in
1976.
 Programme for Advancement of Commercial Technology (PACT) Scheme was
introduced by ICICI in 1985.
These schemes provided some succour to a limited number of SMEs but the activity
of venture capital industry did not gather momentum as the funding was based on
investment evaluation processes that remained largely collateral based, rather than
being holistic, and the policy framework remained unaltered, without the instruments
to inject dynamism in the VC industry. Also, there was no policy in place to
encourage and involve the private sector in the venture capital activity.
Setting-up of TDICI and Regional Funds: 1987-1994
For all practical purposes, the organised venture capital industry did not exist in India
till almost 1986. The role of venture capitalists till then was played by individual
investors and development financial institutions. The idea of venture capital gained
momentum after it found mention in the budget of 1986-87. A 5% cess was levied on
all know-how imports to create the corpus of the venture fund floated by IDBI in
1987. Later, a study was undertaken by the World Bank to examine the possibility of
developing venture capital in the private sector, based on which the Government of
India took a policy initiative and announced guidelines for venture capital funds
(VCFs) in India in 1988.
Soon many other funds followed. The pioneers of the Indian venture capital industry
were largely government-owned banks and financial institutions, with some
contribution from the financial services companies in the private sector.
Entry of Foreign Venture Capital Funds: 1995-1998
Thereafter, the Government of India issued guidelines in September 1995 for
overseas investment in venture capital in India. For tax-exemption purposes,
guidelines were also issued by the Central Board of Direct Taxes (CBDT) and the

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investments and flow of foreign currency into and out of India was governed by the
Reserve Bank of India’s (RBI) requirements. Further, as a part of its mandate to
regulate and to develop the Indian capital markets, the Securities and Exchange Board
of India (SEBI) framed the SEBI (Venture Capital Funds) Regulations, 1996. These
guidelines were further amended in April 2000 with the objective of fuelling the
growth of venture capital activities in India.
CharacteristicsofVenture Capital Funding
Venture Capital Funding can be of different kinds. Early stage funding could be at the
stage of ideation, initial production and marketing. Expansion funding is done during
commercial production, marketing and growth (For more information refer to the
article – Stages of Venture Capital Funding). Different funds focus on different types
of funding and sectors. There are however some unifying characteristics of venture
capital funds.
 Illiquidity: Easy liquidity by cashing out in the short-term is not an option for
venture capital funding. An IPO or buyout of a venture is how venture
capitalists disinvest. A premature IPO could undermine an otherwise
successful company. Alternatively an IPO released in a poor IPO market could
also stall possibilities of cash out.
 Long-term commitment: Venture capital funds need to be latched in for a
period of few years before disinvestment. Investors who do not prefer
illiquidity will attach a premium to their funds, also known as liquidity risk
premium. Therefore an investor who can wait out the time horizon will benefit
from this premium. University endowments who seek VC funds to invest in
are an example of such investors.
 Difficulty in determining current market values: It is difficult to evaluate the
current market value of the portfolio of a VC.
 Limited historical risk and return data and limited information: Venture capital
funds more often than not invest in new and cutting edge industries of a sector,
where there is little historical data or continuous trading data. It is also
difficult to estimate cash flows or the probability of success.

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 Entrepreneurial/management mismatches: Entrepreneurs may face difficulties
when there is dilution of ownership and control. Bad management choices
may scuttle a good venture. Entrepreneurs sometimes find it difficult to step
up as the venture gains size.
 Fund manager incentive mismatches: Investors interested in well performing
rather than large sized funds need to find managers who match their
investment objectives.
 Knowledge of competition: As we discussed earlier since most business’ that
are funded are from nascent industries it is difficult to assess the competition,
than say in established industries. A complete competitive analysis is therefore
difficult to undertake for a VC fund.
 Vintage Cycles: Economic conditions vary from year to year. During some
years venture capital funding is plenty and therefore returns for them low. In
poor or stressed market condition, even good firms find it difficult to find VC
funding.
 Extensive Operation Analysis and Advice: Venture capital funds that plan to
invest in technology companies may not have the required expertise to assess
them. Financial investment knowledge alone is not sufficient. Good fund
managers therefore require both operating and financial analysis and advising
skills. A fund manager who does not understand the business will impede
rather than improve it.
Advantages of VC funding
 Since VC funding is not a loan scheme, there is no repay schedule; which means you
don’t have to repay debt as a cost of doing business.
 Many VCs have consultants and professionals on their staff that have deep
knowledge of specific markets. These experts can help your business avoid many of
the pitfalls that are usually associated with start-ups.
 Being an entrepreneur does not automatically make you a good business manager.
However, since VCs will hold a percentage of equity in your business, they will most
likely have a say in how it is managed. So if you are really not a good manager, this
can be a significant benefit.

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 Because they are obligated to make profit from their investment in your business,
VCs often provide HR consultants (who are specialists in hiring talents) to hire the
best staff for your business. This can help you avoid hiring the wrong people.
 Because VC firms are under strict supervision by regulatory bodies, there are very
few or no unscrupulous VCs.
 VC firms are very easy to locate because they are documented in business directories.
DisadvantagesofVC funding
 Some VC firms require much more ROI than expected. In many cases, it can
be as much 60 percent of the equity in your company. This, in effect, means
the VC firm is controlling your business; not you, the owner.
 Usually, VC firms will want to add a member of their team to your company’s
management team. While this is generally to ensure the success of your
business, it can create internal problems.
 Another big problem you will most likely face when you opt for VC funding is
that you will give up many key decisions on how your company will operate.
This is because the VC firm will require to be informed of any major decision
you make, and they usually have the power to override such decisions.
 Though they generally treat information confidentially, VC firms usually
refuse to sign a non-disclosure agreement due to the legal ramifications of
doing so. This can put your ideas at risk, especially when it’s new.
 Because they are keen on making profit, and they invest huge funds (which
means they take large risks), venture capitalists take too long to decide
whether to invest in your business or not.
 Most VC firms do not release all the needed funds up front. Rather, they
usually release funds in stages with an eye on the expansion of your business.
Because this approach may not be suitable for your funding plans, it may ruin
your business.
 Usually, VC firms want to close the deal and get their investment back within
three to five years. If your business plan contemplates a longer timetable
before providing liquidity, VC funding may not be suitable for you.

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Conclusion
If considering venture capital, the advantages and disadvantages are many. This type
of funding is not right for everyone. Those companies who have high growth potential
such as electronics manufacturers, green technologies, and other high tech ventures
are usually the ones who fare best with venture capital funding. Before you decide
that venture capital is right for you, make sure that you know all of the pros and cons
and do your research.

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II. THE FUNDING PROCESS
Step 1: Business Plan Submission
The first step in approaching a VC is to submit a business plan. At minimum, your plan
should include:
 a description of the opportunity and market size;
 resumes of your management team;
 a review of the competitive landscape and solutions;
 detailed financial projections; and
 A capitalization table
You should also include an executive summary of your business proposal along with the
business plan.
Once the VC has received your plan, it will discuss your opportunity internally and
decide whether or not to proceed. This part of the process can take up to three weeks,
depending on the number of business plans under review at any given time.
Don't be passive about your submission. Follow up with the VC to check the status of
your proposal and to find out if there's additional information you could be providing
that might help the VC with its decision. If you are asked for further information,
respond quickly and effectively. If possible, always try to get a face-to-face meeting
with the VC.
Keep in mind that most VCs receive an average of 200 business plans each month. Of
those, less than five percent will be invited to meet with the VC's partners. Just two
percent will reach the due diligence phase, and less than one percent will be offered a
term sheet. Some 0.3 percent of those submitting a business plan will ultimately
obtain VC funding.
**The overwhelming majority of successful proposals come from a trusted referral of
the VC, such as a limited partner, another VC, a known attorney or accountant, or
other professional. If you can get your business plan referred by such a contact, you
dramatically increase your odds of succeeding in getting VC funding.

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Step 2: Introductory Conversation/Meeting
If your firm has the potential to fit with the VC's investment preferences, you will be
contacted in order to discuss your business in more depth. If, after this phone
conversation, a mutual fit is still seen, you'll be asked to visit with the VC for a one-
to-two hour meeting to discuss the opportunity in more detail. After this meeting, the
VC will determine whether or not to move forward to the due diligence stage of the
process.
Step 3: Due Diligence
The due diligence phase will vary depending upon the nature of your business
proposal. The process may last from three weeks to three months, and you should
expect multiple phone calls, emails, management interviews, customer references,
product and business strategy evaluations and other such exchanges of information
during this time period.
Step 4: Term Sheets and Funding
If the due diligence phase is satisfactory, the VC will offer you a term sheet. This is a
non-binding document that spells out the basic terms and conditions of the investment
agreement. The term sheet is generally negotiable and must be agreed upon by all
parties, after which you should expect a wait of roughly three to four weeks for
completion of legal documents and legal due diligence before funds are made
available.

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III. TYPES OF FUNDING
The first professional investor to a deal at the start-up stage is referred to as the Series
A investor. This investment is followed by middle and later stage funding – the Series
B, C, and D rounds. The final rounds include mezzanine, late stage and pre-IPO
funding. A VC may specialize in provide just one of these series of funding, or may
offer funding for all stages of the business life cycle. It's important to know the
preferences of the VC you're approaching, and to clearly articulate what type of
funding you're seeking:
1. Seed Capital angel investment:
If you're just starting out and have no product or organized company yet, you
would be seeking seed capital. Few VCs fund at this stage and the amount
invested would probably be small. Investment capital may be used to create a
sample product, fund market research, or cover administrative set-up costs.

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Who are Angel Investors?
Angel investors are individuals who invest in businesses looking for a higher return
than they would see from more traditional investments. Many are successful
entrepreneurs who want to help other entrepreneurs get their business off the ground.
Usually they are the bridge from the self-funded stage of the business to the point that
the business needs the level of funding that a venture capitalist would offer. Funding
estimates vary, but usually range from $150,000 to $1.5 million.
The most effective Angels help entrepreneurs shape business models, create business
plans and connect to resources - but without stepping into a controlling or operating
role. Often Angels are entrepreneurs who have successfully built companies, or have
spent a part of their career coaching young companies.
Today "angels" typically offer expertise, experience and contacts in addition to
money. Less is known about angel investing than venture capital because of the
individuality and privacy of the investments, but the Small Business Administration
estimates that there are at least 250,000 angels active in the country, funding about
30,000 small companies a year. The total investment from angels has been estimated
at anywhere from $20 billion to $50 billion as compared to the $3 to $5 billion per
year that the formal venture capital community invests. In fact, the potential pool of
angel investors is substantially larger. There are about two million people in the
United States with the discretionary net worth to make angel investments.

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Angels Investing Network in India
Network Name Contact
Person
Contact Details Service Offered
Chennai Fund Raghu
Rajagopal
www.chennai.tie.org
raghu.rajagopal@energeate.com
Seed Funding for start
ups in Tamil Nadu
Promoters include R.
Ramaraj and others.
Indian Angels
Network
Padmaja
Ruparel
IAN Consultancy Services Pvt. Ltd.
B 8, Shopping Arcade, Hotel Surya
Crowne Plaza, New Friends Colony,
New Delhi 110 065
info@indianangelnetwork.com
Phone - +91 11 4162 8566 Fax - +91 11
4162 9708
India’s first Angel
network with
successful
entrepreneurs and
high profile CEOs
interested in investing
in early stage
businesses across
India.
Mumbai Angels Vimmla www.mumbaiangels.com
vimmla@mumbaiangels.com
Platform to start up
and very early stage
companies; helps in
bringing them face to
face with investors,
mentoring, inputs on
strategy.
TiE
Entrepreneurship
Acceleration
Program
3rd Floor, A wing, Divyasree Chambers,
# 11, O'Shaugnessy Road, Bangalore,
KA - 560 025 Phone : (080)
41474567/68/69
http://www.bangalore.tie.org/
eap-program@tiebangalore.org
Ecosystem of Angels,
Investors and VCs to
provide Series A
round of financing for
Start ups.

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2. Startup Capital:
At this stage, your company would have a sample product available with at
least one principal working full-time. Funding at this stage is also rare. It tends
to cover recruitment of other key management, additional market research, and
finalizing of the product or service for introduction to the marketplace.
3. Early Stage Capital:
Two to three years into your venture, you've gotten your company off the
ground, a management team is in place, and sales are increasing. At this stage,
VC funding could help you increase sales to the break-even point, improve
your productivity, or increase your company's efficiency.
4. Expansion Capital:
Your company is well established, and now you are looking to a VC to help
take your business to the next level of growth. Funding at this stage may help
you enter new markets or increase your marketing efforts. You should seek
out VCs that specialize in later stage investing.
5. Late Stage Capital
At this stage, your company has achieved impressive sales and revenue and
you have a second level of management in place. You may be looking for
funds to increase capacity, ramp up marketing, or increase working capital.
You may also be looking for a partner to help you find a merger or acquisition
opportunity, or attract public financing through a stock offering. There are VCs that
focus on this end of the business spectrum, specializing in initial public offerings
(IPOs), buyouts, or recapitalizations. If you are planning an IPO, a VC may also assist
with mezzanine or bridge financing – short-term financing that allows you to pay for
the costs associated with going public.
A key factor for the VC will be risk versus return. The earlier a VC invests, the
greater are the inherent risks and the longer is the time period until the VC's exit. It

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follows that the VC will expect a higher return for investing at this early stage,
typically a 10 times multiple returns in four to seven years. A later stage VC may be
seeking a two to four times multiple returns within two years.
IV. NON-DISCLOSURE AGREEMENTS (NDAs)
It's not advisable to ask a VC for a non-disclosure agreement, and may even risk
stopping your potential VC deal in its tracks.
Venture capitalists may review hundreds or thousands of business plans in any given
year. Even if you think your ideas are proprietary, they may be just similar enough to
another entrepreneur's that the VC takes on the added risk of legal action against it
just by signing your NDA. Also, for the VC, accepting NDAs adds the administrative
burden of having to keep track of which NDA covers what entrepreneur's ideas.
Rather than focus on an NDA, do your homework to find a reputable VC that can be
trusted with your information.
Top Venture Capital Companies in India
Venture Capital is a financial capital provided to startup, high-risk and high-potential
companies that are in their teething stage. Venture capital fund offers equity in the
companies in which it is invested thereby making money and it normally has business
model or novel technology in high technology industries like software, biotechnology,
etc… It should be remembered that venture capital is a subset of private equity and
therefore all venture capitals are private equities, but not all private equities are
venture capitals.
To start up a venture, venture capital firms in India invest the money of shareholders,
but the ventures in which these companies invest the money of shareholders might be
profitable in nature even though potential risks are involved in these investments. A
number of firms are engaged in the business of venture capital in India and the names
of the top players in the venture capital sector in India are given below:

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Top six venture capital companies in India:
• Aavishkaar India Micro Venture Capital Fund
• DHFL Venture Capital Fund
• iLabs Venture Capital Fund
• IFCI Venture Capital Funds Limited
• India Infoline Venture capital Fund
• Kerala Venture Capital Fund
Some of the details regarding these top venture capital companies are given below:
Aavishkaar India Micro Venture Capital Fund:
Aavishkaar India Micro Venture Capital Fund shortly called as AIMVCF is a fund
created for the purpose of promotion of development in semi-urban and rural areas of
the country. The mission of the fund is based on the premise that promises medium
and small enterprises will help drive positive changes in the underserved areas of the
nation.
DHFL Venture Capital Fund:
This company offers advisory, consultancy and managerial services to venture capital
management, venture capital undertaking and venture capital funds pertaining to
Indian Real estate. This company is promoted by the Dewan Housing Finance
Corporation Limited and the company came into existence in the year 2006. The fund
is registered with securities and exchange board of India.
iLabs Venture Capital Fund:
The present name of iLabs Venture Capital Fund is Peepul Capital LLC and this
company partners with several companies and help those companies to grow through

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entrepreneurship and extensive operative experience. This company holds the pride of
being one of the early entrants of the private equity space in the country.
IFCI Venture Capital Funds Limited:
IFCI Venture Capital Funds Limited was promoted as a Risk Capital Foundation in
the year 1975 by a society that offer financial assistance to the first generation
technocrate entrepreneurs and professionals for setting up their own venture with the
help of soft loans.
India Infoline Venture capital Fund:
This company is a part of the popular India Infoline Group that comprises of several
holding companies. This company is one of the leading players in the Indian financial
service space and it offers execution and advice platform for the whole range of
financial services covering products like gold bonds, investment banking, loans, fixed
deposits, insurance, asset management, wealth management, etc…
Kerala Venture Capital Fund:
Kerala Venture Capital Fund has more than 10 years of experience in this industry
and this company was conceptualized by the Kerala State Industrial Development
Corporation Limited and the SIDBI. This company is dedicated to investing in
enterprises in industries with significant prospects of growth and profitability and in
enterprises in high technology sectors like tourism, biotechnology, information
technology, etc… The investment of this company primarily focuses on the state of
Kerala with special focus on the above-mentioned sectors to earn a good return for the
investors.
Apart from these companies, there are also other top players in the venture capital
sector in India and they are Kotak India Venture Fund, Felicitas Venture Capital
Trust, Industrial Venture Capital Limited and Intelligroup Venture Fund.

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India’s venture capitalindustry
Bangalore: Venture capital investment in Indian firms fell by as much as 71.7% by
value in the first six months of 2009 compared with a year ago, adding to the woes of
businesses already stressed by the global slowdown.
Between January and June, venture capital (VC) firms invested $117 million (about
Rs570 crore), sharply down from the $413 million they had invested in the same
period in 2008, according to a study by Venture Intelligence, a Chennai-based
researcher that focuses on private equity and VC. The number of deals fell to 27 from
67.
Investors wanted to play safe and be cautious in their new deals, said Arun Natarajan,
chief executive officer, Venture Intelligence. Besides, limited partners, who back VC
firms, also have not been keen on new investments. “They were themselves hurt in the
public market and did not want to further increase their risks,” Natarajan said.
Venture Intelligence conducted the study in partnership with Global India Venture
Capital Association.

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The biggest deal in this period was a combined $15 million investment in mobile
broadband gateway provider Stoke Inc. by Reliance Technology Ventures, NetOne
Systems, Kleiner Perkins Caufield and Byers, Sequoia Capital, Integral Capital
Partners, Pilot House Ventures and DAG Ventures.
The other large deals are: JAFCO Asia and VenturEast’s $12 million investment in
si2 Microsystems Ltd, a semiconductor firm, and a $6.5 million investment in Global
Talent Track Pvt. Ltd by Intel Capital and Helion Venture Partners.
Bangalore-based Helion was the most active with six deals, of which four were new,
one was a follow-on deal and another a late-stage deal. Its four new deals were in the
non-information technology (IT) space.
IT and IT-enabled services (ITeS) companies accounted for 52% of the VC deals,
with 14 VC investments in the first six months. In value, VC investments in these
firms were worth about $75 million, or 63% of the total deals. Among ITeS firms,
online services companies attracted 57% of the money.
Domestic demand-driven sectors such as financial services, healthcare and education
also attracted VC attention.
Early-stage deals—first or second round of VC investments into firms less than five
years old—accounted for two-thirds of the investments and 57% in value, the study
shows.
Venture capitalists are optimistic that the economic environment will improve in the
coming months. “While the uncertainty in global financial markets over the last six
months has affected VC investing in India as well, there are clear signs of revival over
the last couple of months, especially in emerging markets like India,” said Sudhir
Sethi, founder and managing director, IDG Ventures India.
India’s venture capital industry witnessing a surge of activity
The last three years have seen a significant expansion of the venture capital industry
in India, as nearly a dozen funds raised billions of dollars to invest in local startups.
Even as several of these funds witness a steep rise in the valuations of portfolio
companies, large global investment firms too are stepping in to bet on fast-growing

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companies in sectors ranging from consumer internet to online retail, enterprise
software and healthcare.
This surge of activity is making venture capital - defined as money used to back new
ideas - the frontrunner in the Indian risk capital industry, which has so far been
dominated by private equity typically used to fuel growth in more mature companies
and industries.
In terms of investments made, the share of venture capital is still minuscule with
about $630 million invested last year compared with private equity inflow of $8.5
billion.
But it accounted for 46% of the total deals in 2013. Early stage deals have steadily
risen from 110 in 2010 to 179 in 2013, while private equity and buyout deals have
fallen from 262 to 213 in the same period, according to data from EY. But it is the
quantum of new funds raised by India-focused venture capital firms in the last three
years - $ 3 billion - that has turned the spotlight on an asset class that is drawing
attention from both local and overseas investors.
Sequoia Capital, the Silicon Valley fund famous for its early bets on iconic companies
such as Google, Apple and messaging app WhatsApp, is the latest to announce an
India fund of $ 530 million, which it unveiled in May.
"We are big believers in global technology companies being built out of India," said
Shailendra Singh, a managing director at the India office of the fund that now
manages a total corpus of $2 billion. The new fund will have a "disproportionate
focus on early and growth stage technology companies", says Singh, whose fund was
amongst the biggest gainers from the public listing of internet classifieds firm Just
Dial last year, earning returns of over 10 times on their partial exit.
It is the promise of such exits that fuels the confidence of venture firms. Billion-dollar
companies are being built in India, "at a much faster frequency than ever seen before",
said Subrata Mitra, partner at Accel Partners, an early investor in the country's largest
online retailer Flipkart. The firm is widely expected to float an initial public offer of
shares on Nasdaq next year.

22. 22
While it took companies like Just Dial and InfoEdge, which owns jobs portal Naukri,
over a decade to reach the $1-billion mark, e-commerce players like Snapdeal and
Flipkart have crossed the milestone in less than seven years. Others such as mobile
advertising platform InMobi and data analytics provider player MuSigma- also
backed by Sequoia-have hit the magic number in less than a decade.
Scenario of venture capital from 2007 to 2012
This has served to change the perception of Indian venture capital amongst both fund
managers and Limited Partners who back these funds. While growth capital funds
have largely failed to deliver returns equivalent to what peers in other Asian countries
have, "some VC firms in India have delivered returns equivalent to what you can
generate elsewhere in Asia", said Wen Tan, partner at FLAG Capital, which invests in
venture funds.
Looking at Venture Capital in the last few years you would think the biggest
investment in India would have been in Infotech, or in services (like Flipkart) or even
in telecom. But strangely, the biggest investment as a percentage has been Real
Estate.
Since 2007, Venture Capital Investments in Real Estate have beaten others by a large
margin, and as of December 2012 were nearly at Rs. 10,000 cr. (about 30% higher
than the next sector – Telecom).
Here’s an interactive graph by Capital Mind’s Data Division. Hover over labels to see
values. Click on the legend to deselect items (so you can remove all except telecom to
see the trend in the telecom sector).

23. 23
Venture Capital (VC) Exit Options
Venture Capital (VC) invests money in the business for getting good Return on Investment
(ROI) for the amount of risks they take by putting their money on startup companies. VC
buys shares of the early stage company at a fixed price and later on they would like to have
substantial gain on the investment at the time of exit period (3-7 years).
VCs would be more interested in listening to entrepreneurs who have a perfect exit
strategy planned for investors. There is various exit option for VC to cash out their
investment:
IPO is about offering company shares in the market for public to buy or 1) Initial
Public Offering (IPO): sell. IPO constitutes the most preferred route for VC exit as it
offers flexibility to investors in terms of time, price and quantity. Through this route,
investors can decide when to sell, at what price to sell and in what quantity to sell

24. 24
depending upon the market scenario. IPO gives a perfect opportunity to reap benefits
for their investment.
Equity Issue Price Current Price %Gain/Loss
September-2014
Snowman Logist 47.00 82.65 75.85
August-2014
Vishal Fabrics 45.00 47.05 4.56
Carewell Inds 15.00 7.30 -51.33
Bhanderi Infra 120.00 121.75 1.46
July-2014
Oasis Tradelink 30.00 35.00 16.67
2) Mergers & Acquisition: M&A offers an opportunity to investors to sell company
shares (partially /fully) to another company. In this case, investors doesn’t have
enough flexibility since pricing,timing and quantity are decided simultaneously during
the process and thereby investors don’t have control over the exit.
Entrepreneurs and investors can sale the business to either strategic partner for a stake
or allow bigger players in the same industry to acquire.
New delhi:
Mergers and acquisitions (M&As) in India witnessed a significant jump in the first six
months this year to $17.1 billion, up over 47 per cent year-on-year, says a report.
"The value of India targeted M&A activity was valued at $17.1 billion in H1 2014, a
47.4 per cent increase from H1 2013 when it stood at $11.6 billion," global deal
tracking firm Merger market has said in the latest report.

25. 25
The April-June quarter of this year saw deals worth $13.4 billion, accounting for 78
per cent of the total first half deal value. In the January-March quarter there were
M&A transactions worth $3.7 billion only.
The second quarter was the most active quarter by value since the Q2 of 2012.
Moreover, there was also an influx of large cap deals compared to the first quarter of
this year.
Two of the largest deals come from UK-based bidders (Diageo and Vodafone Group)
which resulted in an impressive Q2 for inbound activity valued at $ 6.3 billion.
Pharma, medical and biotech were the most active sectors during the first half of 2014
as they cornered 27 per cent of market share from deals worth $4.6 billion.
Interestingly, though the industrials and chemicals sector led the industry chart in
terms of number of deals (27), the deal value totalled to just $0.6 billion, down 61.4
per cent over the corresponding period a year ago.
The $3.97 billion Sun Pharma-Ranbaxy deal was the top item in the first six months
this year, followed by Diageo acquiring 26 per cent stake in United Spirits for $3.14
billion and Vodafone Group's 10.97 per cent stake acquisition in Vodafone India from
Piramal Enterprises for $1.47 billion.
Other major deals were Adani Ports and Special Economic Zone's (APSEZ)
acquisition of Dhamra Port in Odisha from Tata Steel and L&T Infrastructure
Development Projects (L&T IDPL) and Reliance Industries-Network 18 Media deal.
The financial advisor league table was topped by Citi which advised five deals worth
USD 8.2 billion, while EY clinched the first position in terms of number of deals (13
transactions totalling USD 5.2 billion), the report added.
3) Shares buyback: Company promoters or entrepreneur can buy back the company’s
shares from Investors on a fixed price after negotiation. For investors, this is the least
preferred route since ROI in this case is capped. However, investors would like to go
for this VC exit option only when IPO & M&A route is not available to them and
company is not doing well in terms of meeting expectations of investors.

26. 26
According to research firm Venture Intelligence, PE investors pumped $614 million
into five manufacturing companies in 2013. This is significant considering that
between 2002 and 2011, the manufacturing sector witnessed only 13 cases of PE
investors taking control of their investee companies. There was no such transaction in
the sector throughout 2012.
Among the major deals this year are KKR & Co’s $460-million investment in
Alliance Tire in April this year; Blackstone’s $74-million infusion in Agile Electric;
Citi's $56-million investment in Sansera Engineering; and Actis’ $24-million
investment in Halonix Technologies in July this year. In June this year, Oaktree
Capital had picked up a controlling stake in Cogent Glass but deal value was not
disclosed.
4) Sale to Other Strategic Investor/Venture Capital Fund: It is quite possible that VC
prefer to offload their shares to other strategic investors which could be either bigger
angel investors or venture capital funds who are ready to put more money into the
business.
Venture Capital partners always prefer exit option which not only gives them their
investment back but also offer minimum protected return which they could have
earned easily by putting money into the open market investment opportunities.

27. 27
It is advisable that all entrepreneurs must have exit option strategies ready for venture
capital while looking for funds. If you are aware of any other VC exit option, I would
like to hear from you.

28. 28
CASE STUDIES
The Google IPO
Google went public on August 19, 2004, using the "Dutch Auction" method. Ever
since the announcement on the IPO was made in April 2004, the IPO became mired in
some controversy or other. On the one hand, it was a much-awaited IPO -- most IPOs
had not performed well in 2004, so investors were eagerly looking forward to the
Google IPO as Google was a highly profitable company. On the other hand, most
investment bankers had expressed their concerns about the IPO and had declared it to
be a failure even before its launch. Many bankers said that though Google was
profitable at that point, it would not remain so for very long because its competitors -
Yahoo and Microsoft -- were gaining fast on it.
Google's dual share system also came in for criticism. This system, considered
antiquated, was described by most investors as unfair. Just a week before the launch
of the IPO, Google's founders, Sergey Brin and Larry Page violated the rules of the
Securities and Exchange Commission by breaking the "quiet period". Another
violation that SEC discovered was Google's failure to report the shares that it had
issued to its employees and consultants in the period September 2001 and July 2004.
These issues heightened the controversies surrounding the IPO. Unnerved by these
controversies, Brin and Page declared just a day before the launch, that the price of
shares had been reduced to $85 and $95. The number of shares available was also cut
down. However, all these controversies notwithstanding, the Google IPO performed
exceedingly well. It helped the company to collect $1.4 billion, and put Google's
valuation at nearly $30 billion. The success of the IPO effectively silenced all its
detractors.

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Issues:
1. The "Dutch Auction" method of launching an IPO
How does a Dutch auction work?
A Dutch auction is an auction where the bidders all end up paying the same price. In
the context of an IPO, investors place orders for the number of shares they want, and
at what price. The final price is the one at which there are enough investors willing to
buy all the shares in the offering. Investors who bid at or above the “clearing price”
receive shares at that price, even if they’d bid higher; lower bids go unfilled.
By contrast, traditional IPOs rely on an underwriter to buy the shares from the firm
and allocate them to investors at the underwriter’s discretion. Typically, this first
round of investors tends to be hedge funds, institutions and customers of affiliated
brokerages.

30. 30
2. The difference between the conventional IPO launch and the "Dutch Auction"
launch and the advantages and drawbacks of both the systems
Differences between Traditional and Dutch Auction IPOs
Traditional method:
Advantages
 Access to Capital
 Utilizing Equity
 Stock Value Appreciation
 Retain Control
 Liquid Equity
 Media Spotlight
 Control Risk
Traditional IPO Dutch Auction IPO
Pricing
Mechanism &
Share Allocation
Coordinated by underwriting investment
banks
Determined by market via
investor bids
Role of
underwriters
Underwriters set the IPO price, market the
IPO, and support the price in the event of an
undersubscribed offering
Underwriter’s price-setting power
virtually eliminated; lower
transaction costs; underwriters
still market the IPO
Post-IPO price
effect
Potential for a larger pop, because the stock is
“under priced” prior to the IPO
Less potential aftermarket pop,
due to relatively more efficient
pricing and share allocation

31. 31
Disadvantages
 Expenses
 Increase in Filing and Reporting Requirements
 Short Selling, Pump and Dump, "Short and Distort" Activity - Stock
Price Manipulation
Dutch auction method:
Advantages
 The seller recognizes their fullest economic benefits from the sale
 Descending prices ensure bidders will bid promptly when their internal price
is reached
 Quick and simple to implement, easy to understand for bidders
 Everything is done out in the open, transparency to everyone involved
Disadvantages
 The buyer pays their maximum internal price
 Cannot be done when bidders do not all have instant access to information (for
example, someone bidding over the phone would be at a disadvantage due to
the time-delay going through a bidding proxy)
 It only works when 1 product is being sold (If we wanted to sell 2 gold SLS
AMG's at the same times, this Simple Dutch Auction format could not be
used.)

32. 32
3. How controversies before an IPO launch can be harmful to a company
Google's initial price range for the stocks was between $108 and $135 per share, a
fairly high amount that was meant to scare off speculators. Several well-publicized
problems with the IPO caused that price to drop, and by the time the Dutch auction
had concluded, the official starting price was $85 per share.
What were the problems with Google's IPO? The first was an interview published in
Playboy magazine. This violated SEC rules restricting comments that can be made
about a company in the lead-up to an IPO. This could have delayed the IPO, but
Google avoided this by admitting that misleading statements were made in the article
and by issuing a revised prospectus that contained the entire Playboy article -- a move
that probably cost them tens of thousands of dollars in printing costs.
The other mistake was a technical issue regarding the issuance of shares to
employees before the IPO. The company failed to register those shares, forcing them
to offer to buy them back. The SEC fines companies for this mistake.
However, Google's biggest "mistake" was not playing the usual Wall Street game.
The Dutch auction method was meant to give individual investors a chance at the IPO
instead of the usual bystander's role, watching from the sidelines as major investors
and houses bought up all the shares. It worked, but it left the underwriters and the
companies who usually profit from their mutual deals fuming. Google also paid the
underwriters a fraction of the commission they usually earn. Since the value of a stock
depends in part on the efforts of these Wall Street insiders to convince others of that
value, Google's refusal to play ball surely had an effect on the stocks' valuation.

33. 33
Is a Dutch auction really better than the traditional way?
Some people think so. Fans of auctions say they are more democratic, because price is
the only thing that determines who gets shares. A bid by Fidelity for 1 million shares
would go unfilled if it fell below the clearing price; a retired teacher’s bid for 100
shares would be accepted if it was above that price.
Auctions are also seen as serving issuers’ interests, because they award the shares to
the highest bidders. Some venture capitalists and CEOs have complained that the
first-day jump in price for a typical IPO, the “pop,” is a sign that the company could
have gotten more for its shares.

34. 34
case 2 :Tata Motors - the Acquisition of Jaguarand Land Rover
Introduction
In June 2008, India-based Tata Motors Ltd. announced that it had completed the
acquisition of the two iconic British brands - Jaguar and Land Rover (JLR) from the
US-based Ford Motors for US$ 2.3 billion. Forming a part of the purchase
consideration were JLR's manufacturing plants, two advanced design centers in the
UK, national sales companies spanning across the world, and also licenses of all
necessary intellectual property rights.
There was widespread skepticism in market over an Indian company owning the
luxury brands. According to industry analysts, some of the issues that could trouble
Tata Motors were economic slowdown in European and American markets, funding
risks, currency risks etc. Market conditions were extremely tough, especially in the
key US market. Tata’s needed to invest a lot in brand building to make JLR
profitable. Onset of recession not only made investment look mistimed, but also
started wiping out the JLR market.
TATA - JLR deal
Tata had completed this biggest buy-out in the automobile space by an Indian
company on June 2, 2008 as it bought the ownership of luxury brands - Jaguar and
Land Rover. The deal included the purchase of JLR's manufacturing plants, two
advanced design centres in the UK, national sales companies spanning across the
world and also licenses of all necessary intellectual property rights.
Tata Motors was interested in acquiring JLR as it will reduce the company’s
dependence on the Indian market, which accounted for 90% of its sales. Morgan
Stanley reported that JLR’s acquisition appeared negative for Tata Motors, as it had
increased the earnings volatility, given the difficult economic conditions in the key
markets of JLR including the US and Europe.

35. 35
Tata Motors raised $3 billion (about Rs 12,000 crore) through bridge loans for 15
months from a clutch of banks, including JP Morgan, Citigroup, and State Bank of
India. Tata came under cash crisis because of the Corus deal and the huge investments
in the TATA Nano project which itself was surrounded in a lot of uncertainties. The
credit rating companies also took a negative outlook toward this deal because of the
huge debt requirement to complete the deal.
Ford Motors Company (Ford) is a leading automaker and the third largest
multinational corporation in the automobile industry. The company acquired Jaguar
from British Leyland Limited in 1989 for US$ 2.5 billion. After Ford acquired Jaguar,
adverse economic conditions worldwide in the 1990s led to tough market conditions
and a decrease in the demand for luxury cars. The sales of Jaguar in many markets
declined, but in some markets like Japan, Germany, and Italy, it still recorded high
sales. In March 1999, Ford established the PAG with Aston Martin, Jaguar, and
Lincoln. During the year, Volvo was acquired for US$ 6.45 billion, and it also became
a part of the PAG.
Why did TATA go for JLR?
Tata Motors had several major international acquisitions to its credit. It had acquired
Tetley, South Korea-based Daewoo's commercial vehicle unit, and Anglo-Dutch Steel
maker Corus (Refer to Exhibit I for the details of the group's international
acquisitions). Tata Motors' long-term strategy included consolidating its position in
the domestic Indian market and expanding its international footprint by leveraging on
in-house capabilities and products and also through acquisitions and strategic
collaborations.
On acquiring JLR, Ratan Tata, Chairman, Tata Group, said, "We are very pleased at
the prospect of Jaguar and Land Rover being a significant part of our automotive
business. We have enormous respect for the two brands and will endeavor to preserve
and build on their heritage and competitiveness, keeping their identities intact. We
aim to support their growth, while holding true to our principles of allowing the

36. 36
management and employees to bring their experience and expertise to bear on the
growth of the business."
Is deal really worth it?
Morgan Stanley reported that JLR’s acquisition appeared negative for Tata Motors, as it had
increased the earnings volatility, given the difficult economic conditions in the key markets of
JLR including the US and Europe. Moreover, Tata Motors had to incur a huge capital
expenditure as it planned to invest another US$ 1 billion in JLR. This was in addition to the
US$ 2.3 billion it had spent on the acquisition. Tata Motors had also incurred huge capital
expenditure on the development and launch of the small car Nano and on a joint venture with
Fiat to manufacture some of the company’s vehicles in India and Thailand. This, coupled with
the downturn in the global automobile industry, was expected to impact the profitability of the
company in the near future.
Disadvantages if not going for this acquisition.
There was immense pressure from the shareholders, analysts’ community etc. to abort the
deal as they unanimously agreed that it was over priced and the balance sheet of TATA was
not in a position to absorb more loan (as discussed in the previous section). Ford purchased
JLR at $5 bn and sold at almost half the price to TATA after operating it for losses for few
years. As the market would have recovered from recession the valuation would have
increased since there would have been growth in the demand of JLR thus creating more
problems for TAMO. Tata would not have been able enter into the premium segment (>10
lakhs) in India. TAMO would have lacked in robust designing capabilities. Above all, at that
time no other major automobile brand was available for acquisition with such designing and
R&D capabilities.
issues:
1. Understand acquisition of JLR as an example of Tata Motors' inorganic
growth strategy.
Behind acquisition of Jaguar Land Rover, Tata Motors had following strategic
considerations:
1. Long term strategic commitment to automotive sector.

37. 37
2. Opportunity to participate in two fast growing auto segments (premium and
small cars) and to build a comprehensive product portfolio with a global
footprint immediately.
3. Increased business diversity across markets and product segments.
4. Unique opportunity to move into premium segment with access to world class
iconic brands since:
(a)Land Rover provides a natural fit above TML’s Utility
Vehicles/SUV/Crossover offerings for the 4x4 premium category
(b)Jaguar offers a range of “Performance/Luxury” vehicles to broaden the
brand portfolio.
5. Sharing of best practises between Jaguar, Land Rover and Tata Motors in the
future.
6. Long-term benefits from component sourcing, low cost engineering and
design services.
2. Understand the impact of macroeconomic factors on the global automobile
industry.
Political
The main one which is having the greatest effect on innovation in the automobile
industry is political. Many governments are concerned about global warming and it is
the automotive industry which is adding to worsening of the effects of global
warming through the emissions of their vehicles and their manufacturing plants. This
has led to governments to intervene in the automotive industry to make vehicle
manufacturers improve their own vehicles and facilities, through innovations which
have mostly been incremental. However Freedom CAR looks promising for the
environment as it is hoping to create an architectural innovation, the hydrogen fuel
cell vehicles that have little impact on the environment, and help meet the
governments’ reason for creating these market pulls on innovation. It also lacks the
restrictive deadlines and conflicting objectives that PNGV had which will help
increase the program’s chance of success. So it may be political factors that are
having a direct affect on innovation but these political influences are mainly based
factor.

38. 38
Social
Socio-cultural variables such as population, social responsibility, cultural differences,
and the influence of consumer movement affects directly to the automobile industry.
Most of the people concerns the price, mileage, brand of the car, design and style,
after sales service when purchasing a vehicle and depends on what other people think
about their vehicle. Age distribution is a factor that directly influence when focusing
on sales among population, And should be able to develop segments that able to
satisfy different needs of age groups. When purchase vehicles the families are more
sensible factor which influence car purchase decision. Space, safety and budget play a
major role. Need to focus on corporate customers since they buy the largest amount of
vehicles.
Technological
Technological factors and innovations, Research & development plays a most
important role as they improve standards of driving. Fuel consumption is one of a
major problem at the moment, hybrid engines has developed to reduce fuel
consumption. Ex: Honda, Toyota One of a major requirement of the customer is
safety. Seat belts, air bags which protect passengers at a collision, ABS brakes to stop
the vehicle in short distance even in icy surfaces. By investing for Research and
development and innovating new technologies can gain patented and boost sales.
Technological development is support the driver to control the vehicle more
comfortable and easier. Ex: Auto gear, auto parking, Navigation system.
Economic
Over the years prices of automobiles have increased due to the rise of the inflation. In
terms of infrastructural developments the automobile industry is one of most
demanding. One of the major external factors that affect the price elasticity comes
from the oil dependency. Some other factors that cause shifts in supply & price
elasticity;
 Government taxes on manufacturers.
 Prices of external resources (Ex: price of Steel will increase the price of
vehicle)

39. 39
 Population figures
 Buying capacity of people
 Level of economical activities.
Commercial use of automobiles To lower costs outsourcing of materials, components
and some services were increased and technology advancement leads to drop the
prices. This industry brings substantial economic benefits to mother countries. Some
of negative affects and factors of externalities
 Inadequate infrastructure for transport operations
 Cost of running a vehicle
 The automobile industry is largely responsible for traffic congestion.
Dependent on fuel economy High petrol prices do not always bring about a fall in
demand for vehicles since a new car is often more fuel efficient than an older offering
the buyer the chance to save
money. New cars are coming with more fuel efficiently than older, its offers buyer a
hance to save money.
3. Understand the implications of global credit crisis on the availability of funds
for corporate.
The global financial crisis that began in the fall of 2008 severely deepened an ongoing
global economic recession that had been underway since early in the year. The impact
of the crisis on the automotive industry has been more severe than for any other
industry except housing and finance. There are several reasons for this.
First, the industry, especially the value chains led by the American Big 3 automakers,
was in a dire state to begin with. For companies already on life-support, the freezing
of credit markets meant cancelled orders, unpaid supplier invoices, and ‘temporarily’
shuttered plants. Huge debt loads, high fixed-capital costs, high labor costs, and
immense pension and health care commitments to retirees added to the immediacy of

40. 40
the damage. Second, the high cost and growing longevity of motor vehicles prompted
buyers to postpone purchases that they might have otherwise made. Consumers,
especially in the world’s largest national passenger vehicle market, the United States,
found it difficult to obtain loans for purchase and, driven by fear of job loss, moved
aggressively to increase their rate of saving. Vehicle sales plunged and as a result,
beginning in the fall of 2008, pushing the industry into its most severe crisis since the
Great Depression.
Because of the co-location of assembly and parts plants in national and regional
production systems, the effects of the crisis have been largely have been contained
within each country/region. For example, the largest sales decline was experienced in
the United States. While this had a dramatic effect on parts imports, which declined at
an average annual rate of 20.2% over the 2008-2009 period (US International Trade
Commission), the more severe impact of the crisis in the US was on assembly and
parts plants. within North America, some of which not only ceased importing parts,
but temporarily or even permanently closed.

41. 41
Bibliography:
http://profit.ndtv.com/news/industries/article-india-m-a-deals-in-h1-up-47-at-17-
billion-587747
http://fundgator.wordpress.com/2012/09/13/venture-capital-vc-exit-options/
http://www.business-standard.com/article/companies/india
http://in.reuters.com/finance/deals/mergers
http://www.mergermarket.com/pdf/MergermarketTrendReport.Q12014.India.pdf
http://www.investopedia.com
http://www.forbes.com
http://www.business-standard.com/article/economy-policy/buyouts-in-manufacturing-
gain-momentum-113111300734
http://money.howstuffworks.com/ipo7.htm)
(http://blogs.wsj.com/deals/2012/06/21/exactly-what-is-a-dutch-auction/