1. Venture Capital in Developing Countries: Challenges
Nidhi Baijal
HPFGD/AP14/2204
Welingker Institute of Management & Research

2. Venture Capital
Venture capital means funds made available for start-up firms and small businesses with exceptional growth potential
Venture capital is money provided by professionals who alongside management invest in young rapidly growing companies that have the potential to develop into significant economic contributors

3. Features of Venture Capital
Long time horizon
Lack of liquidity
High risk
High tech
Equity participation and capital gains
Participation in management

4. Advantages of Venture Capital
They can provide large sum of equity finance
Able to bring wealth and expertise to your company
Easier to secure future funding from other sources
The business is not obligated to repay the money

5. Disadvantages of Venture Capital
Lengthy and complex process (needs detailed business plan, financial projection and Etc.)
In the deal negotiation stage, you will have to pay for legal and accounting fees
Investors become part owner of your business – founder loss of autonomy or control

6. Stages and Risk of Financing
Financial Stage
Period (funds locked in years0
Risk Perception
Activity to be financed
Seed Money
7-10
Extreme
For supporting a concept or idea or R&D for product development
Start Up
5-9
Very High
Initializing operations or developing prototypes
First Stage
3-7
High
Start commercial production and Marketing

7. Stages and Risk of Financing
Financial Stage
Period (funds locked in years)
Risk Perception
Activity to be financed
Second Stage
3-5
Sufficiently High
Expand market and growing capital need
Third Stage
1-3
Medium
Market expansion, acquisition and product development for profit making company
Fourth Stage
Low
Facilitating public issue

8. VC Investment Process Exit Plan Post Investment Activity
Deal structuring
Due Diligence (Evaluation)
Screening
Deal Origination

9. Methods of Venture Financing
The financing pattern of the deal is most important element.
Following are the various methods of venture financing:
Equity
Conditional loan
Income note
Participating debentures
Quasi equity

10. Exit Route Initial public offers Trade sale Promoter buy back
Acquisition by another company

11. VC in Developing countries : Challenges
Inadequate deal flow for venture capital
Shrinking risk appetite of investors and fund managers
Lack of global awareness about local start-ups
Start-up founders’ mind-set
Lack of local success stories and big hits
Bureaucratic barriers to entry for foreign investment
Inadequate structure/precedence for structuring venture investments
Lack of support from government to encourage venture capital
Lack of trust in local judicial process for dispute resolution

12. Comparison of Developed countries and Developing countries Venture Capital firms
Activity
Developing Countries VC Firms
Developed Countries VC Firms
Fund Structure
Corporation & Limited
Partnership
Limited Partnership
Capital Sources
Pension Funds, Corporations,
Insurance Companies, High Net
Worth Individuals, Government
& Non Governmental
Organizations
Worth Individuals
Types of investments: Traditionally
Privatizations, Corporate
Restructuring, Strategic Alliances,
Infrastructure Funds
High-technology, Early-stage,
High growth firms
Types of investments: Recently
Indigenous Technology in Developing Countries
Trend towards Late-stage

13. Comparison of Developed countries and Developing countries Venture Capital firms
Activity
Developing Countries VC Firms
Developed Countries VC Firms
Deal Origination
Low number of attractive
investments, Focus on quality of
management, Problems of country
risk, Corruption, Exchange rate
risk
Focus on quality of
management
Deal Structuring
Common stock and debt
Common stock, several classes
of preferred stock, debt and
convertible preferred stock
Pricing the Deal
Difficulty in assessing the value of
an investee company – lack of
transparency
Higher level of transparency
Exit Strategy
Sale to third parties, co-investors,
investee firm’s management
Initial public offering (IPO)

14. Venture Capital Funding in India
Promoted by
All India Financial Institutions
State level Financial Institutions
Commercial Banks
Private Sector Institutions

15. Venture Capital Funds in India
VCFs in India can be categorized into following five groups
Those promoted by the central Government controlled development finance institutions. For example:
ICICI Venture funds Ltd.
IFCI Venture Capital Funds Ltd.
SIDBI Venture Capital Ltd.

16. 2). Those promoted by State Government Controlled Development Financial Institutions.
For Example:
Punjab InfoTech Venture Fund
Gujrat Venture Finance Ltd.
3). Those Promoted by Public Banks
SBI Capital Market Ltd.

17. 4). Those Promoted by Private Sector Companies
For Example:
IL&FS Trust Company Ltd.
Infinity Venture India Fund
5). Those established as an Overseas Venture Capital Fund
HSBC Private Equity
Walden International Investment Group

18. Rules by SEBI
VCFs are regulated by the SEBI (Venture Capital Fund) Regulations, 1996.
The following are the various provisions.
A venture capital fund may set up by a company or a trust, after a certificate of registration is granted by SEBI on an application made to it. On receipt of the certificate of registration, it shall be binding on the venture capital fund to abide by the provisions of SEBI Act, 1992.
A VCF may raise money from any investor Indian, Non-Resident Indian or foreign, provided the money accepted from any investor is not less than Rs. 5 Lakhs. The VCF shall not issue any document or advertising inviting offers from the public for subscription of it’s security or units.

19. Rules by SEBI
SEBI regulations permit investment by venture capital funds in equity or equity related investments of unlisted companies and also in financially week and sick industries whose shares are listed or unlisted
At least 80% of the funds should be invested in venture capital companies and no other limits are prescribed
SEBI Regulations don’t provide for any sectorial restrictions for investment except investment in companies engaged in financial services.

20. Challenges of VC in India

21. Challenges of VC in India
Lack of Scientific and Technical Research
Inadequate Technology advancement
Attraction limited to top cities (Mumbai, Chennai, Pune, Delhi, Hyderabad and Bangalore)
Fiduciary duty owed by the directors
Capital market related issues
Longer Pay back period
Uncertainty regarding success of the product in the market
The size of the market
Major Competitors and their Market Share