CHAPTER -1
INTRODUCTION
1.1 INTRODUCTION
Venture capital, a financial innovation of the twentieth century, is a long-term liquid investment, which can be in the form of equity, quasi-equity and sometimes debt in new and high-risk ventures. Venture capital became better known after the famous legend of Apple Computers, which started out in the US in 1977 with the capital firm, Arthur Rock & Co. Apple Computers then made it to the Fortune 500 and Arthur Rock & Co. attained height in Venture capital industry. However the success of Venture Capital in USA stimulated world countries to practice on Venture capital.
A number of technocrats are seeking to set up shop on their own and capitalize on opportunities. In the highly
…show more content…
Companies such as Digital Equipment Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel, Microsoft and Genentech are famous examples of companies that received venture capital early in their development.
In India, these funds are governed by the Securities and Exchange Board of India (SEBI) guidelines. According to this, venture capital fund means a fund established in the form of a company or trust, which raises monies through loans, donations, issue of securities or units as the case may be, and makes or proposes to make investments in accordance with these regulations.
1.3 OBJECTIVES
Venture Capital is one of the fastest emerging sources of finance for new entrepreneurs. In spite of its increasing popularity, funding via Venture Capital is faced with a number of difficulties. Thus, it is important to study the various aspects of raising funds through Venture Capital.
1. Trends in the Indian Venture Capital Industry.
2. To study the current Indian scenario.
3. To find out the different contributors to the Indian Venture Capital Industry and their investment industry wise.
4. To identify the major players in the Indian Venture capital Industry.
5. To identify the problems faced by the Indian venture Capitalists.
6. To study the various guidelines of the regulatory body “SEBI”.
1.4 SCOPE
Major limitation of the project has been the unavailability of current data, of the contributors to
These entrepreneurs start a company knowing from day one that their vision could change the world. They attract investment from equally crazy financial investors – venture capitalists. They hire the best and the brightest. Their job is to search for a repeatable and scalable business model. When they find it, their focus on scale requires even more venture capital to fuel rapid expansion. Steve Blank acknowledged that scalable startups in innovation clusters (Silicon Valley, Shanghai, New York, Bangalore, Israel, etc.) make up a small percentage of entrepreneurs and startups but because of the outsize returns, attract almost all the risk capital.
Walnut Venture Associates are a group of angel investors. In 1997 the club had around a dozen individual investors, forming an “angel group”. Their primary targets are investments ranging from $250,000 to $1,000,000. This is due to the gap of capital funds initiated by the VC’s from not considering investments bellow $1 million. Also, angel investors can acquire significant equity at low cost, and help the growth of the company with their knowledge and expertise. By selecting only the most exceptional people and ideas, investments in startups can lead to massive returns on relatively small investments. As unexperienced entrepreneurs, they are a key resource to have in order to achieve quick growth, and secure the company’s early stages.
Gage, Deborah. " The Venture Capital Secret: 3 Out of 4 Start-Ups Fail." WSJ. Wall Street Journal, 20 Sept. 2012. Web.
Before now, only entrepreneurs in a few select areas with the right connections could be funded, and only then if their vision matched a VC or Angel Investors criteria or schedule. Consequently, only a few thousand VCs in the world could decide which entrepreneurial
Exhibit 4 shows that over 300 Venture Capitalists out of 441 retain 20% of the profits their investments generate and the rest is in the 20/25% range except for the odd outliers at 10, 15 and 30%. Exhibit 5 indicates that the correlation with the size and age of the Private Equity organisation is rather weak and that the objectives of the funds and historical trends are no better predictors.
Zacharakis and Meyer’s research (1998) into the investment decision-making processes of VC investors is particularly pertinent to whether VC investments can be systematically improved and whether there are any gaps between understanding of their procedures and what happens in reality. Zacharakis, via studying 53 VCs from the two main start-up hubs in the United States (Silicon Valley and Colorado Front Range), establishes that there is a gap between the factors that affect VCs’ decision-making in reality and the factors that VCs identify as pertinent to their decision-making.
Venture Capital is a specific term that refers to funding obtained from a venture capitalist. These are professional serial investors and may be individuals or part of a firm. Often venture capitalists have a niche based on business type and or size and or stage of growth. They are likely to see a lot of proposals in front of them (sometimes hundreds a month), be interested in a few, and invest in even fewer. Around 1-3% of all deals put to a venture capitalist get funded. So, with the numbers that low, you need to be clearly impressive.
The advantage of venture capital is that it provides money to help your business set up and establish itself.
The financial crisis wreaked much havoc on so many new businesses that were planning on selling stocks to the public for future growth and development (Ante, 2008). Ground-breaking companies are taking on much risk since they can no longer seek help from investors in the populace, and they are finding it even harder to be snapped up in procurement (Ante, 2008). The number of “venture-backed” companies
Walnut Venture Associates is a small group of angel investors with backgrounds in the software industry. RBS is a small software company that makes billing and enterprise management software specifically targeted at other software companies. RBS and Walnut are deciding whether Walnut should invest in RBS, and then if they are willing, whether RBS finds the terms of the deal satisfactory. This case memo illustrates that the venture capitalists are looking for good managers in a particular industry, while entrepreneurs typically think funding is dependent on having a good idea. It also discusses why or why not RBS and Walnut might be a good fit for each other.
Corporate venture capital (CVC) is the act of investing in companies with a variety of equity and licensing deals. CVC has two goals. First, is to improve the strategic position and core competence of the parent company. Second, is to create financial returns for the parent company through new products, procedures and services.
In return for financing one to two years of a company’s start-up, venture capitalists expect a ten times return of capital over five years. Combined with the preferred position, this is very high-cost capital: a loan with a 58% annual compound interest rate that cannot be prepaid. But that rate is necessary to deliver average fund returns above 20%. Funds are structured to guarantee partners a comfortable income while they work to generate those returns. The venture capital partners agree to return all of the investors’ capital before sharing in the upside. However, the fund typically pays for the investors’ annual operating budget—2% to 3% of the pool’s total capital—which they take as a management fee regardless of the fund’s results. If there is a $100 million pool and four or five partners, for example, the partners are essentially assured salaries of $200,000 to $400,000 plus operating expenses for seven to ten years. (If the fund fails, of course, the group will be unable to raise funds in the future.) Compare those figures with Tommy Davis and Arthur Rock’s first fund, which was $5 million but had a total management fee of only $75,000 a year.
The term ‘Venture Capital’ is associated with the funding of start-ups by venture capitalists, which show potential to make it big in the future. The venture capitalists earn by getting ownership equity in the firm. The main of form of venture capital investments begin after the initial seed funding. Venture capital is essential for the companies who focus on novel ideas, because it is difficult to get a loan from banks for it.
investors exist for larger amounts of capital such as VC funds and banks, entrepreneurial initiatives that require much smaller amounts to start with need to rely on friends and family or own savings. They then also make extensive use of bootstrapping techniques to mitigate their financial constraints, by boosting their short-term profits.
The last one Venture capitalists. It is finance provided for an equity stake in a potentially high growth company.