Changing Focus of Venture Capitalists in India -A Study

Changing Focus of Venture Capitalists in India-A Study

Dr. M.P.Shiva Kumar Food and Agribusiness School (FABS), Hyderabad

1Venture capital has become an increasingly important source of financing for new companies, particularly when such companies are operating on the frontier of emerging technologies and markets.2The venture capital industry as an institution is a good example that prides itself on nursing companies, rather than just financing them.3The roles played by venture capitalists are many

they offer knowledge and contribute to the growth of companies

help the firm obtain alternative sources of equity finance

help their portfolio firms 4The underlying assumption is that the entrepreneur and the venture capitalist would act together in the interest of the enterprise as 'partners. 5Venture capital is the capital available for financing a new business venture. It is also often thought of as the early stage financing of new and young enterprises seeking to grow rapidly. 6Venture Capital Definition

The National Venture Capital Association defined venture capital as: money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors(NVCA 2001). 7Return on Investment in Venture CapitalVenture capitalists are particularly interested in securing large returns on investments. Table below provides some commonly sought targets, which are flexible. (Table Source: W.KeithSchilit, How to obtain venture capital ", Business Horizons, May/June 1987.PP-78, Foundation for the school of business at Indiana university.)

8Stage of businessExpected annual return on investmentExpected increase on initial investmentStart-up business (Idea stage)60% +10-15 *investmentFirst-Stage financing(New business)40%-60%6-12*investmentSecond-Stage financing (Development stage)30%-50%4-8*investmentThirdStage financing(Expansion stage)25%-40%3-6*investmentTurnaround situation50% +8-15*investment9Investment Determinants of the Venture Capital Firm

Venture capital funds popularly known as High Risk Capital then come forward to provide finance and go beyond finance in order to make the assisted firms have an easy take-off in the commercial horizon of the economy.10A venture capital fund studies and critically examines the under mentioned variables to make 'SWOT' analysis of the ventures before it takes financing decision.11ManagementGeorge Doriot, the most successful venture capital funds expert in the USA says,' we can back a first rate management team with a second rate product and have success, but if we back a first rate product with a second rate management team, we can seldom achieve our objectives'.12Market It is carefully judged whether the product/service of the projected venture could cater to a large and rapidly growing market and whether it accrues competitive advantage in the prevailing economic environment. Besides, the industrial growth prospects of the venture in the immediate future are also surveyed.13TechnologySelection of technology is one of the most critical factors. Venture capital fund as the potential investor, judges the effectiveness of the new technology that can secure capital growth in the assisted firms.14ProfitabilityVenture capital funds favor those firms for investment that can project a high degree of profitability. Cash-generation capacity of the ventures is also examined before arriving at a decision for investment. 15The Indian Venture Capital Industry

Economic liberalization of India has brought new financial products and services to nurture and support the growth of the industrial sector. In such direction venture capital financing has come to assure significantly the development of entrepreneurship and exploit technological potential of India.16The U.S. has the most developed venture capital market in the world with a high level of deal processing expertise (By grave and Timmons, 1999). In contrast, the Indian venture capital market emerged in the late 1980s following a series of measures to establish government sponsored risk capital corporations and capital gains tax concessions for venture capital investments (Mishra, 1996; Verma, 1997). 17The Indian Venture Capital industry (IVCI) is just about a decade old as compared to that in Europe and U.S. In this short span it has nurtured close to 1000 ventures, mostly in SME segment and has supported budding technocrat/professionals all through. 18In India, however, the potential of venture capital investments is yet to be fully realized. Today India has over 50 VC funds and equity funds operating in the country.1920Venture Capital Focus in India

VC funds no more only tech drivenAs the tides of investments change over time, venture capital (VC) funds are shifting their focus to businesses related to consumer demand, such as education, media and entertainment, food & beverages etc..

21Though the IT sector attracted the biggest share of VC money all these years in India, several factors, including the limited size of the market for IT solutions in the country, are turning out to be deterrents for investments in IT start-ups. VCs are also likely to emphasize more on capital efficiency, and those companies would probably get funded. 22Venture capitalists are getting more selective about funding start-ups and looking beyond information technology and training their money and efforts on a variety of other sectors for instance, in its second coming, the Indian health care industry which is growing at an exponential rate, now presents an attractive investment opportunity for Indian venture capital firms. *The list of Sectors of most active VCs going beyond IT See Table

23SectorsYear 2006Year 2007Year2008Year2009Year2010 YTDDealsAmtDealsAmtDealsAmtDealsAmtDealsAmtIT &ITES683808447081475452431386BFSI613159614572073420Health care &Life Sciences133114631254114349Energy2132111190651417Manufacturing2254272174400Media & Entertainment542629114642600Telecom262173721115Agribusiness003231531000Education0053573648326Engg & Construction130032121000Food & Beverages417644231300Retail61762221411110Other Services72431772563421324Favorite avenues for Venture Capital InvestmentsVCs have expanded from largely a product focus to investing in service businesses. India, as a whole, has moved from the labor arbitrage to value adds model in the outsourcing space. India now provides solutions for the global market place and VCs are following in the same footsteps. 25Today most importantly VC space is expanding to sectors beyond technology. With fundamental economic growth spanning across sectors in India, segments that escaped the scrutiny of VCs during the tech boom have begun attracting attention. The major focused areas include media, healthcare, education, infra, retail and food services. The modern VC ecosystem is a mix of IT and non-technology, catering to domestic, global solutions demand. 2627VC High on India

Venture Capitalists and private equities are expected to invest over $ 8 billion in India in the next five years, in areas such as biotechnology and life sciences, logistics, clean technology, film production and education.28Expected investment ($ In Billion) Sectors 1.5 (By 2012)Biotechnology and Life Sciences2Maritime Infrastructure and Logistics3.5Cleantech0.25 (By 2011)Indian Film Industry200Indian Education29Conclusion Venture capital (VC) firms, as it happens, are still investing. While the pace of investments has slowed down on an industry-wide basis, the venture capital firms are becoming more restrictive about the industries in which they are willing to invest, but we can conclude that VCs not only want to continue to invest in Indian start-ups in areas they are most familiar with, i.e., in IT, telecom and Internet related products and services but also to initiate potential investments in the rapidly emerging sectors.

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