09-02-2013, 10:32 AM
Investment Contours of Venture Capital Funds in India : An Analysis
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Abstract
This paper discusses the investment practices of venture
capital firms in general in India and in particular with regard
to select venture capital funds along with the profiles and
perceptional analysis of select venture capital firms over
various aspects of their investment, in terms of selection, duediligence,
monitoring and exit mechanism in a comprehensive
manner.
Introduction
Entrepreneurs who need venture capital financing for their
enterprises should have sufficient information to be able
to choose a venture capital company or fund suitable for
their requirement and have a broad understanding of the
procedures required to be followed for obtaining financial
assistance at different stages of implementation of their
projects. Basically they need to develop a business plan
or prototype to get venture finance. The business plan is a
document that conveys a company’s prospects and growth
potential, and thereby sells the business to potential backers.
The process is to be managed just as most other business tasks
are managed. It requires advances preparation; delegation,
refinement, and discipline-, as do most important business
functions. Companies are increasingly being called on to
provide written business plans. Financial backers, especially
venture capitalists and other private investors have long
sought business plans before making investment decisions.
Appraisal of the Individual behind the project
The appraisal of business plan or project proposal is done
very carefully and the proposal is judged by evaluating the
entrepreneur behind the proposal with reference to experience
and background, genius and resourcefulness. Her credentials
are verified from different sources, such as bankers, auditors,
previous employers, suppliers and potential customers. The
technical skills and managerial traits of the entrepreneur
are also evaluated through experts. Her commitment to the
venture, self-confidence and, drive, initiative and personal
responsibility, and capacity to set realistic goals, persevere and
solve problems, are all evaluated. Experience in joint ventures,
collaborations and high technology production processes
as well as the educational and business background of the
entrepreneur also come in for consideration. Given such a
stringent appraisal of the entrepreneur, only 10 per cent of
the proposals are generally cleared at this stage.
For sanctioning venture capital for any project in India
under venture capital scheme, the following are the major
considerations for funds.
Screening Committee
Different practices are followed in evaluating the business plan
by venture capital funds in India. It is due to the situation, some
VCCs/VCFs engage experts, others set up screening committees
to scrutinize the proposal in terms of cost, technology, markets,
etc. Hence, all most all the funds commonly focus on the
following issues in their evaluation process.
Focus on Techno-economic Aspects
Every project is subjected to an expert techno-economic
evaluation. Project cost and means of finance is also closely
evaluated with reference to sources of finance. Profitability
estimated is studied with reference to market projections.
The involvement of VCF is determined in the light of funds
requirements, availability of exit route, etc.
Risk Analysis
This is an important element of the appraisal. The basic risks
involved in a project are identified as market risk, product risk,
technology risk and entrepreneurial risk. Market risk may arise
due to poor response form buyers, unexpected competition,
lack of adequate support from business channels, etc. Product
risk would arise if the new technology involved in the production
process, or the product itself, were to fail. Technological risk
generally arises when an entirely new and untried technology
is used. Finally, entrepreneurial risk may arise due to the
entrepreneur’s lack of managerial skill, experience and
business expertise.
Other Financial Instruments
There are some other innovative financial instruments being
used by some VCFs in India. They are like partially convertible
debentures offer flexibility in structuring the deals to both
venture capitalists and the enterprises. The instruments
have two parts: one is converted into equity and the other
remains as loan. This keeps the equity of the company within
manageable limits.
Cumulative convertible preference (CCP) shares can help to
adjust risk portfolio. CCP are deemed as equity and therefore
assure a large equity base for borrowings. CCP shareholders
are not entitled to voting. These enables the management tot
remains in full control of the company. However, under section
87(2)(a) of the Companies Act, 1956, they have a right to vote
on resolutions that directly affect their rights or if the dividend
has not been paid for an aggregate period of not less than two
years preceding the date of meeting.
Indian Practice Compared
One common feature with regard to the investment evaluation
criteria of VCFs in the USA, Japan, Singapore and India is that
all of them focus their top attention to the entrepreneur's
personality and experience. However, in terms of the specific
traits of the entrepreneurs' personality and experience, the
Indian practice differs significantly from that in the USA,
Singapore and Japan. Fore example, amongst the five criteria
most frequently rated as essential ion the USA, Singapore and
Japan, the entrepreneur's characteristics include sustained
intense efforts, familiarity with target market and ability to
evaluate and handle risk well. None of these traits appears in
the top five criteria in India. In India, the characteristic of the
entrepreneur in the top five criteria include integrity, urge to
grow, commercial orientation, long-term vision and well-thought
out strategy to remain ahead of the competition.
Conclusion and Suggesitions
Venture capital emerged as a unique financial instrument in
19th century to promote new and innovative business proposals
put forth by the first generation and technocrat entrepreneurs
in a big way. In fact, it is the outright solution for any country
and means of finance in turning the creative ideas and abilities
of the entrepreneurs into very fruitful and viable commercials
aspects. Not only that, even venture capital can promise in a
greater way the development of our country through promoting
the entrepreneurs in a gigantic way as a driver and vehicle of
entrepreneurship devolvement of the country. So, the practices
of VC are not same and one country to country particularly in
analyzing, selection, scrutinizing, nurturing, managing, even
in due-diligence and finally exit mechanism.