VENTURE CAPITAL FINANCING IN INDIA: AN INSIGHT INTO HIGH- RISK FINANCING FOR INNOVATIVE GROWTH

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1 VENTURE CAPITAL FINANCING IN INDIA: AN INSIGHT INTO HIGH- RISK FINANCING FOR INNOVATIVE GROWTH INTRODUCTION * Abhimanyu Singh Growth is the process that only happens when the untread is tried and the undone is materialized. The venture capital investment helps for the growth of innovative entrepreneurships in India. Venture capital has developed as a result of the need to provide nonconventional, risky finance to new ventures based on innovative entrepreneurship. Venture capital is an investment in the form of equity, quasi-equity and sometimes debt - straight or conditional, made in new or untried concepts, promoted by a technically or professionally qualified entrepreneur. Venture capital means risk capital. It refers to capital investment, both equity and debt, which carries substantial risk and uncertainties. The risk envisaged may be very high may be so high as to result in total loss or very less so as to result in high gains. For any new venture we undertake there is always apprehension of misses than hitting the bull s eye and this apprehension for years has curbed the entrepreneurs from innovating and growing. Venture Capital is the conduit for giving the entrepreneurs wings to fly when they are willing to jump of the cliff. Simply put, Venture Capital is a term coined for the capital required by an entrepreneur to venture into something new, promising and unconventional. Investing in a budding company has always been a risky proportion for any financier. The risk of the business failure and the apprehensions of an all together new project clicking weighed down the small entrepreneurs to get the start-up fund. The Venture Capitalists or the angel investors then came to the forefront with an appetite for risk and willingness to fund the ventures. Venture Capital financing is a process whereby funds are pooled in for a period of around 10 years and investing it in venture capital undertakings for a period of 3 to 5 years with an expectation of high returns. To protect the funds of the investors against the risk of losses, venture capital fund provides its expertise, undertake advisory function and invest in the patient capital of the undertaking equities. Venture Capital financing had been a popular source of funding in many countries and served as a lucrative bait to create a similar industry in India as well. 15

2 The venture capital industry in India is still at a nascent stage. With a view to promote innovation, enterprise and conversion of scientific technology and knowledge based ideas into commercial production, it is very important to promote venture capital activity in India. India s recent success story in the area of information technology has shown that there is a tremendous potential for growth of knowledge based industries. This potential is not only confined to information technology but is equally relevant in several areas such as bio-technology, pharmaceuticals and drugs, agriculture, food processing, telecommunications, services, etc. Given the inherent strength by way of its skilled and cost competitive manpower, technology, research and entrepreneurship, with proper environment and policy support, India can achieve rapid economic growth and competitive global strength in a sustainable manner. A flourishing venture capital industry in India will fill the gap between the capital requirements of technology and knowledge based start-up enterprises and funding available from traditional institutional lenders such as banks. The gap exists because such start-ups are necessarily based on intangible assets such as human capital and on a technology-enabled mission, often with the hope of changing the world. Very often, they use technology developed in university and government research laboratories that would otherwise not be converted to commercial use. However, from the viewpoint of a traditional banker, they have neither physical assets nor a low-risk business plan. Not surprisingly, companies such as Apple, Exodus, Hotmail and Yahoo, to mention a few of the many successful multinational venture-capital funded companies, initially failed to get capital as start-ups when they approached traditional lenders. However, they were able to obtain finance from independently managed venture capital funds that focus on equity or equity-linked investments in privately held, high-growth companies. Along with this finance came smart advice, hand-on management support and other skills that helped the entrepreneurial vision to be converted to marketable products. 16

3 HISTORICL BACKGROUND USA is the birth place of Venture Capital Industry. During most its historical evolution, the market for arranging such financing was informal. Entrepreneurs primarily relied on the resources of wealthy families. It was in 1946 that American Research and Development Corporation (ARD), a publicly traded, closed-end investment company was formed. The best known investment of ARD was the start-up financing it provided in 1958 for computer maker Digital Equipment Corp. ARD provided its original investors with a 15.8 percent annual rate of return over its twenty-five years as an independent firm though it had difficult times in the beginning. The number of such specialized investment firms, which later were called venture capital firms, began to boom in the late 1950s. The creation of federal Small Business Investment Company (SBIC) program in 1958 aided the growth of venture capital firms. Hundreds of SBICs were formed in the 1960s, and many remain in operation today. During the 1960s and 1970s, venture capital firms focused their investment activity primarily on starting and expanding companies. More often than not, these companies were exploiting breakthroughs in electronic, medical or data-processing technology. As a result, venture capital came to be almost synonymous with technology finance. Venture capital firms suffered a temporary downturn in 1974, when the stock market crashed and investors were naturally wary of this new kind of investment fund was the first big year for venture capital when the industry raised approximately $750 million. Legislation made it possible for pension funds to invest in alternative assets classes such as venture capital firms only in Shortly thereafter, 1983 was the boom year - the stock market reached new heights. During the year, there were over 100 initial public offerings for the first time in U.S. history.this year has become memorable also because many of today's largest and most prominent firms were founded. However, due to the excess of IPOs and the inexperience of many venture capital fund managers, VC returns were very low during the 1980s. The VC firms retrenched, worked hard and created new criteria for investment. The work paid off and with the new criteria for investment the returns began climbing back and portfolio companies started becoming successful. 17

4 VENTURE CAPITAL IN INDIA Venture Capital in India was known since the nineties era. It is now that it has successfully emerged for all the business firms that take up risky projects and have high growth prospects as well. Venture Capital in India is provided as risk capital in the forms of shares, seed capital and other similar means. Venture Capital activity in the past was possibly done by the developmental financial institutions like IDBI, ICICI and State Financial Corporations. These institutions promoted entities in the private sector with debt as an instrument of funding. For a long time funds raised from public were used as a source of Venture Capital. This source however depended a lot on the market vagaries. And with the minimum paid up capital requirements being raised for listing at the stock exchanges, it became difficult for smaller firms with viable projects to raise funds from public. In India, the need for Venture Capital was recognised in the 7th five year plan and long term fiscal policy of GOI. In 1998, ICICI emerged as a venture capital provider with Unit Trust of India. And now, there are a number of venture capital institutes in India. Financial corporations like ICICI have stepped until this and have their own venture capital subsidiaries. Apart from Indian investors, international companies too have settled in India as a financial institute providing investments to large business firms. It is because of foreign investors that financial markets have developed in India on a large scale. Introduction of western philosophies, tight contracts, focus on profitable projects and active involvement in finance was contributed by foreign investors only. Research and Development Cess Act, 1986 introduced in the fiscal budget for the year , is the precursor of the concept of venture capital as a new financial service in India. This Act imposed 5 per cent cess on all know-how import payments to create a pool of funds for, inter alia, venture capital activities. Technology Development Fund (TDF) was set up in the year , through the levy of this cess on all technology import payments. TDF was meant to provide financial assistance to innovative and high-risk technological programs through the Industrial Development Bank of India. 18

5 This measure was followed up in November 1988, by the issue of guidelines by the (then) Controller of Capital Issues (CCI). These stipulated the framework for the establishment and operation of funds/companies that could avail of the fiscal benefits extended to them. However, another form of venture capital which was unique to Indian conditions also existed. That was funding of green field projects by the small investor by subscribing to the Initial Public Offering (IPO) of the companies. Companies like Jindal Vijaynagar Steel, which raised money even before they started constructing their plants, were established through this route. In March 1987, Industrial Development Bank of India (IDBI) had become the first to introduce Venture Capital Fund (VCF) scheme for financing ventures seeking development of indigenous technologies / adaptation of foreign technology to wider domestic applications. Thereafter, Industrial Credit and Investment Corporation of India (ICICI) started financing technology-oriented innovative companies. ICICI in association with Unit Trust of India (UTI) formed a venture capital subsidiary called TDICI - Technology Development and Information Company of India - with headquarters at Bangalore, for taking up venture capital activity. Industrial Finance Corporation of India (IFCI) formed Risk Capital and Technology Finance Corporation (RCTC), with headquarters at New Delhi. TDICI is now known as ICICI Venture Funds Management Company Ltd. or ICICI Venture; and RCTC is now known as IFCI Venture Capital Funds Ltd. (IVCF). Their main focus is on development and commercialisation of viable indigenous, often, untried technologies. Almost at the same time, Credit Capital Venture Finance Limited was started in the private sector. This has mobilised funding from global funding agencies, with the joint sponsorship of Commonwealth Development Corporation, London (U.K.), Credit Capital Finance Corporation, Asian Development Bank (ADB), and Bank of India, a public sector bank in India. Parent Institution & Venture Fund Promoted: Parent Institution Venture Fund promoted ICICI TDICI, renamed as ICICI Venture Funds Management Company or ICICI Venture 19

6 IFCI IL & FS RCTC, renamed as IFCI Venture Capital Funds Ltd. (IVCF) Pathfinder GIIC Gujarat Venture Capital Finance Ltd. (GVCFL), with all India coverage APIDC APIDC Venture Capital Ltd., with coverage as Andhra Pradesh Canara Bank Canfina - VCF, with focus on southern states In 1973, a committee on Development of small and medium enterprises highlighted the need to faster Venture Capital as a source of funding new entrepreneurs and technology. Venture Capital financing really started in India in 1988 with the formation of Technology Development and Information Company of India Ltd. (TDICI) - promoted by ICICI and UTI. The first private VC fund was sponsored by Credit Capital Finance Corporation (CFC) and promoted by Bank of India, Asian Development Bank and the Commonwealth Development Corporation viz. Credit Capital Venture Fund. At the same time Gujarat Venture Finance Ltd. and APIDC Venture Capital Ltd. were started by state level financial institutions. Sources of these funds were the financial institutions, foreign institutional investors or pension funds and high net-worth individuals. Venture Capital Funds are regulated by the SEBI (Venture Capital Fund) Regulations, The regulation clearly states that any company or trust proposing to carry on activity of a Venture Capital Funds shall get a grant of certificate from SEBI. Section 12 (1B) of the SEBI Act also makes it mandatory for every domestic Venture Capital Funds to obtain certificate of registration from SEBI in accordance with the regulations. Hence there is no way that an Indian Venture Capital Fund can exist outside SEBI Regulations. However registration of Foreign Venture Capital Investors (FVCI) is not mandatory under the FVCI regulations. 20

7 A VCF and registered FVCI enjoy several benefits: No prior approval required from the Foreign Investment Promotion Board (FIPB) for making investments into Indian Venture Capital Undertakings (VCUs). As per the Reserve Bank of India Notification No. FEMA 32 /2000-RB dated December 26, 2000, an FVCI can purchase/ sell securities/ investments at a price that is mutually acceptable to the parties and there is no ceiling or floor restriction applicable to them. A registered FVCI has been granted the status of Qualified Institutional Buyer (QIB), so they can subscribe to the share capital of a VCU at the time of initial public offer. A lockin of one year is applicable to the shares subscribed in an IPO. The lock-in period applicable for the pre-issue share capital from the date of allotment, under the SEBI (Disclosure and Investor Protection) Guidelines, 2000 is not applicable in case of a registered FVCI and VCF. Under the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 if the promoters want to buy back the shares from FVCIs, it would not come under the public offer requirements. TYPES OF VENTURE CAPITAL FUNDS in India 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. The Venture funds in India can be classified on the basis of: a) Promoters i. 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. 21

8 ii. iii. iv. 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) VCFs promoted by Public Sector banks such as Canfina by Canara Bank and SBI- Cap by State Bank of India. 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. b) Genesis i. Financial Institutions Led By ICICI Ventures, RCTC, ILFS, etc. ii. Private venture funds like Indus, etc. iii. Regional funds like Warburg Pincus, JF Electra (mostly operating out of Hong Kong). iv. Regional funds dedicated to India like Drap er, Walden, etc. v. Offshore funds like Barings, TCW, HSBC, etc. vi. Corporate ventures like Intel. c) Investment Philosophy Early stage funding is avoided by most funds apart from ICICI ventures, Draper, SIDBI and Angels. Funding growth or mezzanine funding till pre IPO is the segment where most players operate. In this context, most funds in India are private equity investors. d) Size of Investment The size of investment generally varies between less than US$1mn, US$1-5mn, US$5-10mn, and greater than US$10mn. As most funds are of a private equity kind, size of investments has been increasing. IT companies generally require funds of about Rs30-40mn in an early stage which fall outside funding limits of most funds and that is why the government is promoting schemes to fund start ups in general, and in IT in particular. 22

9 e) Value Addition The venture funds can have a totally "hands on" approach towards their investment like Draper or "hands off" like Chase. ICICI Ventures falls in the limited exposure category. In general, venture funds who fund seed or start ups have a closer interaction with the companies and advice on strategy, etc while the private equity funds treat their exposure like any other listed investment. This is partially justified, as they tend to invest in more mature stories. In addition to the organized sector, there are a number of players operating in India whose activity is not monitored by the association. Add together the infusion of funds by overseas funds, private individuals, angel investors and a host of financial intermediaries and the total pool of Indian Venture Capital today, stands at Rs. 50 billion, according to industry estimates! Despite availability of funds, the primary markets in the country have remained depressed for quite some time now. In the last two years, there have been just 74 initial public offerings (IPOs) at the stock exchanges, leading to an investment of just Rs billion. That s less than 12% of the money raised in the previous two years. That makes the conservative estimate of Rs36bn invested in companies through the Venture Capital/Private Equity route all the more significant. Recommendations of K.B. Chandrasekhar Committee on Venture Capital The recommendations of the K.B. Chandrashekhar Comittee on Venture Capital funds are given below: 1. Multiplicity of regulations need for harmonisation and nodal Regulator: Presently there are three set of Regulations dealing with venture capital activity i.e. SEBI (Venture Capital Regulations) 1996, Guidelines for Overseas Venture Capital Investments issued by Department of Economic Affairs in the MOF in the year 1995 and CBDT Guidelines for Venture Capital Companies in 1995 which was modified in 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 23

10 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 FIIs, tax benefits and foreign inflows/outflows are automatically available once these entities are registered with SEBI. Therefore, SEBI should be the nodal regulator for VCFs to provide uniform, hassle free, single window regulatory framework. On the pattern of FIIs, Foreign Venture Capital Investors (FVCIs) also need to be registered with SEBI. 2. Tax pass 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. There is a well established successful precedent in the case of Mutual Funds which once registered with SEBI are automatically entitled to tax exemption at pool level. It is an established principle that taxation should be only at one level and therefore taxation at the level of VCFs as well as investors amount to double taxation. Since like mutual funds VCF is also a pool of capital of investors, it needs to be treated as a tax pass through. 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. 3. Mobilisation of Global and Domestic resources: (A) Foreign Venture Capital Investors (FVCIs): Presently, FIIs registered with SEBI can freely invest and disinvest without taking FIPB/RBI approvals. This has brought positive investments of more than US $10 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. This investment being long term and in the nature of risk finance for start-up enterprises, needs to be encouraged. Therefore, at least on par with FIIs, FVCIs should be registered with SEBI and having once registered, they should have the same facility of hassle free investments and disinvestments without any requirement for approval from FIPB / RBI. This is in line with the 24

11 present policy of automatic approvals followed by the Government. Further, generally foreign investors invest through the Mauritius-route and do not pay tax in India under a tax treaty. FVCIs therefore should be provided tax exemption. This provision will put all FVCIs, whether investing through the Mauritius route or not, on the same footing. This will help the development of a vibrant Indiabased venture capital industry with the advantage of best international practices, thus enabling a jump-starting of the process of innovation. The hassle free entry of such FVCIs on the pattern of FIIs is even more necessary because of the following factors: (B) (i) Venture capital is a high risk area. In out of 10 projects, 8 either fail or yield negligible returns. It is therefore in the interest of the country that FVCIs bear such a risk. (ii) For venture capital activity, high capitalisation of venture capital companies is essential to withstand the losses in 80% of the projects. In India, we do not have such strong companies. (iii) The FVCIs are also more experienced in providing the needed managerial expertise and other supports. Augmenting the Domestic Pool of Resources: The present pool of funds available for venture capital is very limited and is predominantly contributed by foreign funds to the extent of 80 percent. The pool of domestic venture capital needs to be augmented by increasing the list of sophisticated institutional investors permitted to invest in venture capital funds. This should include banks, mutual funds and insurance companies up to prudential limits. Later, as expertise grows and the venture capital industry matures, other institutional investors, such as pension funds, should also be permitted. The venture capital funding is high-risk investment and should be restricted to sophisticated investors. However, investing in venture capital funds can be a valuable return-enhancing tool for such investors while the increase in risk at the portfolio level would be minimal. Internationally, over 50% of venture 25

12 capital comes from pension funds, banks, mutual funds, insurance funds and charitable institutions. 4. Flexibility in Investment and Exit: (A) Allowing multiple flexible structures: Eligibility for registration as venture capital funds should be neutral to firm structure. The government should consider creating new structures, such as limited partnerships, limited liability partnerships and limited liability corporations. At present, venture capital funds can be structured as trusts or companies in order to be eligible for registration with SEBI. Internationally, limited partnerships, Limited Liability Partnership and limited liability corporations have provided the necessary flexibility in risk-sharing, compensation arrangements amongst investors and tax pass through. Therefore, these structures are commonly used and widely accepted globally specially in USA. Hence, it is necessary to provide for alternative eligible structures. (B) Flexibility in the matter of investment ceiling and sectoral restrictions: 70% of a venture capital fund s investible funds must be invested in unlisted equity or equity-linked instruments, while the rest may be invested in other instruments. Though sectoral restrictions for investment by VCFs are not consistent with the very concept of venture funding, certain restrictions could be put by specifying a negative list which could include areas such as finance companies, real estate, gold-finance, activities not legally permitted and any other sectors which could be notified by SEBI in consultation with the Government. Investments by VCFs in associated companies should also not be permitted. Further, not more than 25% of a fund s corpus may be invested in a single firm. The investment ceiling has been recommended in order to increase focus on equity or equity-linked instruments of unlisted start-up companies. As the venture capital industry matures, investors in venture capital funds will set their own prudential restrictions. 26

13 (C) Changes in buy back requirements for unlisted securities: A venture capital fund incorporated as a company/ venture capital undertaking should be allowed to buy-back up to 100% of its paid up capital out of the sale proceeds of investments and assets and not necessarily out of its free reserves and share premium account or proceeds of fresh issue. Such purchases will be exempt from the SEBI takeover code. A venture-financed undertaking will be allowed to make an issue of capital within 6 months of buying back its own shares instead of 24 months as at present. Further, negotiated deals may be permitted in unlisted securities where one of the parties to the transaction is VCF. (D) Relaxation in IPO norms: The IPO norms of 3 year track record or the project being funded by the banks or financial institutions should be relaxed to include the companies funded by the registered VCFs also. The issuer company may float IPO without having three years track record if the project cost to the extent of 10% is funded by the registered VCF. Venture capital holding however shall be subject to lock in period of one year. Further, when shares are acquired by VCF in a preferential allotment after listing or as part of firm allotment in an IPO, the same shall be subject to lock in for a period of one year. Those companies which are funded by Venture capitalists and their securities are listed on the stock exchanges outside the country; these companies should be permitted to list their shares on the Indian stock exchanges. (E) Relaxation in Takeover Code: The venture capital fund while exercising its call or put option as per the terms of agreement should be exempt from applicability of takeover code and 1969 circular under Section 16 of SC(R)A issued by the Government of India. 27

14 (F) Issue of Shares with Differential Right with regard to voting and dividend: In order to facilitate investment by VCF in new enterprises, the Companies Act may be amended so as to permit issue of shares by unlisted public companies with a differential right in regard to voting and dividend. Such flexibility already exists under the Indian Companies Act in the case of private companies which are not subsidiaries of public limited companies. (G) (H) (I) QIB Market for unlisted securities: A market for trading in unlisted securities by QIBs is developed. NOC Requirement: In the case of transfer of securities by FVCI to any other person, the RBI requirement of obtaining NOC from joint venture partner or other shareholders should be dispensed with. RBI Pricing Norms: At present, investment/disinvestment by FVCI is subject to approval of pricing by RBI which curtails operational flexibility and needs to be dispensed with. 5. Global integration and opportunities: (A) Incentives 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. (B) Incentives 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. 28

15 Internationally, 70% of successful start-ups are acquired through a stock-swap transaction rather than being purchased for cash or going public through an IPO. Such flexibility should be available for Indian startups as well. Similarly, shareholders can take advantage of the higher valuations in overseas markets while divesting their holdings. (C) Global investment opportunity for Domestic Venture Capital Funds (DVCF): DVCFs should be permitted to invest higher of 25% of the fund s corpus or US $10 million or to the extent of foreign contribution in the fund s corpus in unlisted equity or equity-linked investments of a foreign company. Such investments will fall within the overall ceiling of 70% of the fund s corpus. This will allow DVCFs to invest in synergistic start-ups offshore and also provide them with global management exposure. 6. Infrastructure and R&D : Infrastructure development needs to be prioritized using government support and private management of capital through programmes 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. 7. Self Regulatory Organisation (SRO): A strong SRO should be encouraged for evolution of standard practices, code of conduct, creating awareness by dissemination of information about the industry. 29

16 Implementation of these recommendations would lead to creation of an enabling regulatory and institutional environment to facilitate faster growth of venture capital industry in the country. Apart from increasing the domestic pool of venture capital, around US$ 10 billion are expected to be brought in by offshore investors over 3/5 years on conservative estimates. This would in turn lead to increase in the value of products and services adding up to US$100 billion to GDP by Venture supported enterprises would convert into quality IPOs providing over all benefit and protection to the investors. Additionally, judging from the global experience, this will result into substantial and sustainable employment generation of around 3 million jobs in skilled sector alone over next five years. Spin off effect of such activity would create other support services and further employment. This can put India on a path of rapid economic growth and a position of strength in global economy. Conclusion Venture Capital in India is still at its early stages. While there is a large number of Private Equity Funds looking to invest over $10 million per investment, there are only a few Funds who want to invest $1 mn to $6 mn in early stage companies. This is primarily because the early stage companies require lot more work, hand holding and guidance. The risks of investing in such companies are much higher. In addition, smaller size Funds find it difficult to afford good quality resources to add value in such investments due to the constraints of their respective Fund economics arising out of the size of their Funds. The biggest challenge emerging before the venture capital industry in India, in addition to the challenge of raising funds in tough market situations, is to find the right set of passionate resources for each of their portfolio companies to support their growth at early stages. The reason many companies fail at early stages is not only because they are not able to mobilize funds at initial stages, but because they are not able to attract the right talent to work with them and to guide them. Those VCs who are able to bring the right resources along with their funding are the ones that will succeed in the long Term. 30

17 There are various challenges that the VC Funds are likely to face going forward. On the Fund raising side, the Investors are increasingly asking harder questions on the track records and performance of Funds. Funds that have not shown positive performance are finding it extremely difficult to raise their next Funds. Overall, there are not too many successful examples due to that fact that Venture Capital Funds take 5 to 6 years to exit from each portfolio company and the industry itself is now getting more organized now. As we see more exits in the next four to five years, the confidence levels of Investors will increase further and one will see more infusion of Funds at early stage companies. On the investing side, entrepreneurs are increasingly becoming savvier and would want to share value only if they see real value from the VC funds more than just the money itself. Therefore, the Funds bringing additional value would be able to generate better returns for their investors. On the regulatory side, SEBI has recently come up with new guidelines for the domestic Venture Capital Funds. These guidelines pose new challenges as well offer opportunities to many existing and new Funds in the market. The real benefits of these guidelines are yet to be seen by the Funds.There are immense opportunities in Healthcare and Life Sciences, Education, Rural/Agriculture, Energy/Clean-tech as well as Cyber security and Forensics for the nascent venture capital companies to invest. The innovative applications of emerging technologies in these sectors are particularly exciting the budding venture capital funds and their future rest upon the emergence of such sectors in India. REFERENCES 1. Mitra D (2000), The Venture Capital Industry in India, Journal of Small Business Management, Vol.38, No.2, pp Dewan A.H (2000), Financing the Microprograms of NGOs: A case study, Journal of Developmental Entrepreneurship, vol.2, No.2, pp Talluru Sreenivas and D. Nagayya (2005), Venture Capital Recent Trends in the Liberalisation Context, Unpublished paper. 4. Bearger N and Gregory F (1998), The Economics of Small Business Finance: The Roles of Private Equity and Debt Markets in the Financial Growth Cycle, Journal of Banking and Finance, Vol.22, No. 6-8, pp

18 5. Shepherd D, Ettenson R and Croch A (2000), The Venture Strategy and Profitability: A Venture Capitalist s Assessment, Journal of Business Venturing, Vol. 15, No. 5-6, pp Bhushan, Dewan (2001), E-Commerce, S. Chand and Company, New Delhi, Chapter 10 Venture Capital, pp National Productivity Council (NPC) (1999), Productivity - Special Issue on Venture Capital, 40(3), October - December, published by New Age International (P) Ltd. - Journals Division, New Delhi for NPC. 8. Pandey, I.M. (1996), Venture Capital: The Indian Experience, New Delhi, Prentice Hall of India Private Limited. 9. Pandey, I.M. et al. (2003), Colloquium on Entrepreneurship and Venture Capital, Vikalpa, 28(1), January - March, pp Renuka Ramnath (2005), Venture Funds: Activity Gains Momentum, in The Hindu Survey of Indian Industry 2005, Chennai, Kasturi & Sons Ltd., pp Securities and Exchange Board of India (SEBI) (2000), Report of the Working Group on Structure of Venture Capital Funds (Chairman: K.B. Chandrasekhar), Mumbai. 12. Singhvi, L.K. (1999), Venture Capital Industry in India - an Agenda for Growth, Productivity, 40(3), October - December, pp Sudhir Sethi (2001), Venture Capital - Sustaining the Momentum, in The Hindu - Survey of Indian Industry 2001, Chennai, Kasturi & Sons Ltd., pp. 83 & Varshney, Vishnu (2001), Venture Finance - Highlights, in Small Industries Development Bank of India (SIDBI) (ed.), Technology for Small Scale Industries - Current Status and Emerging Needs, New Delhi, Tata McGraw-Hill Publishing Company Ltd., pp Hirsh R and Peters M.P (2005), Entrepreneurship, McGraw -Hill, New Delhi, pp Hirsh R and Jankowicz (1990), Intition in Venture Capital Decisions: An ExploratoryStudy Using a New Technique, Journal of Business venturing, Vol. 5, No. 1, pp Smilor Ray (2001), Daring Visionaries, How Entrepreneur Build Companies, Adams Media Corporation, Massachusetts, USA, pp