10-05-2014, 02:31 PM
Venture Capital and Innovation: The Indian Experience
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Abstract
This paper presents an overview of evolution of venture capital support for
innovation in India. There are three governmental supported schemes and a
large number of venture funds currently in operation. An analysis of venture
capital funding trends indicates that venture capital also has strong linkages with
innovation-based clusters. The paper also summarizes the support provided by
the venture funds to innovative firms. It has been observed that though they are
many determinants the two major elements that contributed to the success of
venture capital assisted firms are: providing market linkages and sharpening
the business plan. From the firm side, experiential base of the entrepreneurs
and clarity of the market are the factors that reduced the market uncertainty. The
analysis shows that linkages between innovation, clusters and venture support
are becoming tighter. This has got immense importance in public policy arena.
Support for creating clusters and developing high-tech entrepreneurs are likely to
be the interventions that are effective.
BACKGROUND OF THE INDUSTRY
In the last decade, one of the most admired institutions among industrialists and
economic policy makers around the world has been the US venture capital
industry [Dossani and Kenney 2002]. The sensitivity of venture capital process
to government policies and other factors that influence entrepreneurship and
innovation was highlighted in a study by the US General Accounting office on
behalf of the Joint Economic Committee [Premus 1985].
Venture capital
entrepreneurship and innovation have been closely connected. Entrepreneurs
have long had ideas that require substantial capital to implement but lacked the
funds to finance these projects themselves [Gompers and Lerner 2002]. Venture
capital evolved as a response to this felt need. Venture capital represent one
solution to financing the high risk, potentially high-reward projects [Gompers and
Lerner 2002]. The experience of US, Taiwan and Israel show that technological
innovation and the growth of venture capital markets are closely interrelated
[Premus 1985].
Evolution of VC Industry in India
The first major analysis on risk capital for India was reported in 1983 [Chitale
1983]. It indicated that new companies often confront serious barriers to entry
into capital market for raising equity finance which undermines their future
prospects of expansion and diversification. It also indicated that on the whole
there is a need to revive the equity cult among the masses by ensuring
competitive return on equity investment.
This brought out the institutional
inadequacies with respect to the evolution of venture capital.
Major recommendations of the VC committee:
The committee came to the conclusion that the venture capital industry in India is
still at a nascent stage. It also stated that 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. The report prepared a vision, identified strategies for growth and how to
bridge the gap between traditional means of finance and the capital needs of the
high growth start-ups.
VC Trends in India
Initially, only Indian financial institutions were operating VC funds. Then off-shore
funds came into VCF. In 1997, Government of India supported a quasi VC fund –
Technology Development Board. After the entry of offshore VC funds, the VCs
started evolving. This along with IT boom made innovative entrepreneurial firms
to evolve. The growth of VCs occurred, mostly, in selected clusters.
Growth Trends: Prior to 1988, in the absence of an organized venture capital
industry, individual investor and development financial institutions have hither to
played the role of venture capitalists in India. Initial response was poor but by
1995 the VC industry picked up. The SEBI initiated interaction with industry
participants and experts in the early 1999 led to a series of changes. Strictly
speaking the results of the earlier years and current growth are not comparable
because of the difference in capital investment requirements.
TECHNOLOGY DEVELOPMENT BOARD
Government of India initiated a major fund for supporting innovations in 1995.
This is a quasi-venture capital fund. It supports high opportunity projects by
providing equity or loan. It is a revolving fund. Government of India operated two
more similar funds. These are smaller in scope and of limited coverage. In the
case of TDB loan or equity till the project is commercialized there is no
repayment needed. After commercialization of the venture interest has to be paid
back. The Technology Developed Board invests in equity capital or gives soft
loan to industrial concerns and other agencies, attempting development and
commercial application
of
indigenous technology or adapting imported
technology to wider domestic applications.