My part is methology and data analysis, this is project work, please only do that part which is mine, see what friends did so y
My part is methology and data analysis, this is project work, please only do that part which is mine, see what friends did so you do other part
Introduction
The uniqueness of the most present young generation is aspiring to become an entrepreneur, but only a limited number of people gain access to knowledge becoming an entrepreneur. Tools of becoming an entrepreneur are not just ideas to create start-ups, but also a vast amount of knowledge, resources, connections, and many more skills are required to be a successful entrepreneur. Mentioning about resources, financial resources, or financial support has an undeviating impact on the entrepreneur’s life. Every innovative start-up requires capital as a primary essential component. In that sense, Venture capital plays a significant role in funding start-ups.
The phenomenal stories of great successful entrepreneurs involved with a crucial part of their career are known as Venture capital. The purpose of this research paper is to understand the Venture capital in every possible way, and their role in the start-ups and applying them to the real-world would help to overcome the lack of knowledge in the field of Venture capital industry especially for the entrepreneur seeking to understand Venture capital industry.
Why India?
India has massive potential for being a super economic nation in the future. India has seen rapid activity in the Venture capital industry in recent times, and the Indian Venture capital industry is nor underdeveloped or highly developed. Also, narrowing it down to a particular country is gives a more precise understanding and helps to focus the survey on every cornerstone.
Why Start-ups?
The primary benefited sector of companies from the Venture Capital industry are Start-ups since start-up’s basic necessity is to obtain funding to serve there every day need in business processes. In the end, start-ups are the ones among the companies, which turns out to be successful. This research paper is focusing on the Tech industry start-ups. Since about 80% of Venture Capital investments in 2019 was concentrated in just Tech industry such as Consumer tech, Software/ SaaS, Fintech and B2B commerce, and other Tech related industries. (Bain reports, 2020). Globalization highly concentrated in the Tech industry, which grabs the attention of Investors and Vential capital industry.
Research Objectives
• To ensure the role of Venture capital for the growth of Micro, small, and medium enterprise, including start-ups in the Indian tech industry.
• Analysis between Venture capital and Angel investors on the Tech start-ups.
• Impact of Venture capital financing in India which challenges the economy.
• To explain the present situation of venture capital in India.
Thesis structure
This thesis is divided into four different chapters. The first section presents the Introduction for the research and the research objectives as well as the thesis structure. The second chapter begins with the definition of Venture Capital and continues with the Evolution of Venture capital in India. Furthermore, this chapter provides some of the primary and most significant factors influencing Investment in start-ups. The author used a literature review from academic sources such as academic journals and books, as well as considering this chapter as the basis for the understanding of the thesis objectives.
The third chapter explains the methodology of this study, the research approach and data design, sampling, data collection, how the data was analyzed and the limitations of the research. Furthermore, it interprets the data collected and the results to link it directly and indirectly with the research questions to come up with usable and valuable information.
The last chapter is the overall conclusion of the study as well as recommendations for the further scholar and academic studies as well as pointing out the limitation the author faced during the whole process of writing this thesis.
Literature review
Definition of Venture Capital.
Venture capital can be most simply defined as risk-equity investing. It is an activity by which investors support firms with a combination of two important components “know-how” and “capital”, in order to exploit market opportunities. Venture capitalists aim to achieve long-term, above-average returns. (Darek Klonowski, 2010)
The term Venture Capital is easily defined as to raise a pool of money to invest in an entity at a specific stage or help to grow new technology, new products, or new service in the aim to gain liquidity.
In a board way it is known as the Private equity name itself describes as owning equity privately of a private firm and narrowing the Private equity splits up into Venture capital and private equity’ Private equity firms can buy companies from any industry while venture capital firms are limited to start-ups in technology, biotechnology, and clean technology. Private equity firms also use both cash and debt in their Investment when it is not about equity, whereas venture capital firms deal with equity only. These observations are common cases. However, there are exceptions to every rule. A firm may act out of the norm compared to its competitors’ . The following thesis exclusively deals with Venture capital, so going in detail about venture capital.
Venture capital has more control over the start-up when compared to private equity since they are focused on controlling their capital and getting involved in the places, including the hire and fire of CEOs. Venture capital’s primary attention is at the early stage of the start-ups, so basically, it never just focus on the performance of a company such as private equity.
Venture capital firms can provide valuable expertise or individual, the strategic direction towards the growth of firms and business connection in addition to their initial capital investment, so this the reason the venture capital often invests in a particular industry that they are knowledgeable about or previously worked in that Industry. The following thesis focused on Tech start-ups.
Figure 1: Own illustration based on research.
Every individual or firm has a particular goal to invest in a firm since Venture capital also typically has a goal besides being the shareholders of the company, which has been investing in the firm. After gaining a certain amount from Investment or higher investment profits, they intend to exit from the firm and exit typically be after gaining from about ten times the amount of the Investment.
Two types of Venture capital firms.
Indeed, Venture capital firms are differentiated into two types based on how the venture capital firms are sponsored, Venture capital is supported by two types are wealthy individual and banks, corporation, or Government (Da Rin, Hellmann, & Puri, 2011).
Categories of Venture capital firms.
Venture capital firms are categorized with few factors. These factors are solely based on the personal interest of a particular Venture capital firm. The following few factors are
• Stage based Investment
• Industry based Investment
• Geographical location-based Investment
Stage based Investment
The fundamental difference between the venture capital firms are based on the particular time when the fund invested. The particular time is known as stages, stage at which the portofolio company is functioning and to be invested at that particular stage. Stages are described based on the company seeking for the Investment, how specific company is experienced in the market. Usually, the stages follow with:
Seed stage investment:
The fund raised on the firm during the early stage of product development or specific time where the idea of the firm is starting to implement for the business level, aiming for potential growth. Seed stage investment is the essential stage requirement for the fund, and also the most laborious stage to attract the investors since the risk level is too high. On this stage, firms named as start-ups
Typical funding ranges between $500k to $2 million.
Early-stage/ Series A:
The early-stage or Series A funding focused on the firms which are primarily in the next stage of product development and prioritizing in the long run of the firm. At this particular stage, the firm has a subsequent amount of customers to present the cash flow of the firm.
Typical funding ranges between $2 million to $7 million.
Expansion/ Series B:
After the firm gained a significant increase in revenues and cash flow and the necessity fund during this particular stage is known as expansion funding or Series B round. During this stage, investors can be easily impressed by the firm to achieve its success on a large scale.
Typical funding ranges between $10 million to $15 million.
Pre-public stage/ Series C:
The final stage of funding a firm requires to be a market leader at their particular Industry also the most comfortable way to get funded at this particular stage since it has proved its growth and presents the sign of less risky Investment to the Investment providers.
Typical funding is $15 million and above.
Industry based Investment
The portfolio firm’s Industry plays a major role in Venture capital. Also, there is a preference for selecting a particular industry due to high previous experiences or knowledge in a similar industry. Venture capital firms are risk-oriented field; reducing risk involves many vital elements. One of the most important among those of vital elements is analyzing and selecting a particular industry of venture capital’s portfolio firm. Due to the high trend in the Tech Indusrty, most of the Venture capital firms are highly attracted towards the Tech and Tech related industry. Currently, Fintech is showing its power in treading Industries. Including AI, B2B Tech, FinTech, PropTech, and SaaS.
Geographical location-based Investment
The focus on the one particular area, region, or country to invest is a criteria for particular Venture capital firms due to the concentration of an enormous amount of high potential growth portfolio companies or the targeted sector of industries are located in that geographical location. A notable instance of this is silicon valley due to vast numbers of growth potential, and previously successful firms give opportunities and hopes for the venture capital firms to invest in that particular region.
Process of Venture capital funding.
Generally, this section of the research focuses on how the Investment of Venture capitalist or Venture Capital firm is processed to its portfolio company to grow business together. Portfolio companies are the list of companies which most likely to be invested shortly or most interested companies to invest by the Venture capital.
The risk factor is significantly excessive for high capital investment on firms due to lack of collateral; hence the strict method of process of funding is required.
Figure 2: Process of Venture Capital.
Investors
· Provide capital
Portfolio Companies
· Use capital
Venture capital firms
· Identity and screen opportunities
· Transact and close deals
· Monitor and add value
· Raise additional funds
(Source: Bygrave and Timmons, 1992, p. 11)
Three leading players involved during the process are funding are Investors, Venture capital firms, and the portfolio companies. Each player plays a crucial role accordingly. Venture capitals are highly professional in the field of Identifying and evaluating quality entrepreneurial ideas. Figure 1 represents the basic idea of members involved and their crucial roles.
The venture capital process is dynamic by nature and each of the phases is connected to the others and involves a wide range of stakeholders (Gompers and Lerner, 2002).
Figure 3 : Model 1-The Venture capital investment process. Darek Klonowsk (2010, P.27)
The venture capital process is dynamic by nature and each of the phases is connected to the others and involves a wide range of stakeholders (Gompers and Lerner, 2002).
According to Model 1 Darek Klonowsk (2010) the process of inventment divides into five parts such as
1. Deal generation.
2. Investment Screening.
3. Investment evaluation.
4. Investment structuring.
5. Post- investment activities(Exit).
Summarize of Venture capital process
1. Deal generation:
In this particular process, the raise of capital for Investment is initiated by the members of the Venture capital firm and also determining the objectives of the Investment.
2. Investment Screening:
The process of filtering down the most effective Investment from the group of available investments depending on the analyzes of the venture capital firms are also based on interest in the particular Industry. Measuring market validation for functional product prototype or analyzing similar previous products in the market.
3. Investment evaluation:
The core work of Venture capital starts with this process. The majority of post-investment activities are happening in this process and after the process of screening, selecting the optimistic portfolio company. Evaluation of the particular portfolio company is initiated for the documentation process with verifying veracity, usually with the external firms which are specialized with the particular work. Such as legal term sheets.
4. Investment structuring:
After the investment deals are successfully passed the evaluation process, structuring aims to attain the win-win situation for both the Investee and Venture capital or Investor in this process, which also includes the negotiation. The process includes monitoring the Investment, executive’s decisions, the appointment of a new board of directors, and managing the demand and supply of investments.
5. Post- investment activities (Exit):
The final stage and also one of the vital stage of the Venture capital Investment process, also known as Exit of Venture capital, primarily disinvestment occurs when there is Initial Public Offering (IPO) or sale of whole strategic Investment, and this largely attains after the triumphant return on Investment is achieved. Lack of high risk is a major benefited factor of this process, but there are interested venture capital willing to reinvest on the firm. The exit process plays an essential role in the profits of returns. Acquisitions from other companies is also a route of exit or post Investment activities.
“We see an IPO as a reasonable route towards an exit providing market conditions are buoyant and for businesses which meet certain thresholds. A key threshold is scale – to attract high-quality investors and good research coverage, businesses ideally need a market capitalization greater than EUR500m”. Stuart Paterson, (Ernst & Young, 2020)
Venture Capital in India
Evolution of Venture capital in India
The risk-taking attitude is one of the essential parts of the financial world. Indian culture has a less risk-taking attitude in the field of financial Investments. Therefore the Venture capital started the boom in the late 1990s after the technology and tech-related Industry got stronger,
On the other hand, there was risk capital provided by the government before the private equity concept, known as the Risk capital foundation.
In 1988, the start of modern Venture capital in India to bring development in technology, especially in information technology companies. A joint venture fund management with two company ICICI (The Industrial Credit and Investment Corporation of India) and the Unit Trust of India forming the TDICI (Technology Development and Information Company of India Ltd. Along with this Indian government started implementing the guidelines to start the institute level of venture capital. This Venture capital was more risker since it had a narrow definition of Venture capital and focused on the innovative technologies which started by the first generation entrepreneurs. World Bank-supported institutes emerged during the same time for several venture capital firms. “The World Bank selected six institutions to start Venture Capital investment in India, viz., TDICICI (ICICI), GVFL, Canbank Venture Capital Fund, APIDC, RCTC (now known as IFCI Venture Capital Funds Ltd.) and ILF (now known as Pathfinder).” (Viswanatha Reddy, C. (2014)).
Later after half a decade government stepped up with new guidelines regarding the tax payment of venture capital up until it was 20 percent of the income gained from the investments. During the Finance minister speech during the budget 1995-96, free from tax obligations for income from dividends and profits from investments in venture capital firms. Venture capital firms registered from SEBI (The Securities and Exchange Board of India). SEBI established on April 12, 1992, following the provisions of the Securities and Exchange Board of India Act, 1992. Purpose establishment of SEBI is to serve as an interim administrative body to promote orderly and healthy growth of the securities market and for investor protection. (SEBI)
Later in 1997, all of a sudden, the globalization started in the field of Information Technologies industry expansion started at a tremendous pace in India. Also, the Venture capital significantly played a significant role in funding those start-ups helping to boost and match the pace during this era in India, where the bonding between the technology and the Venture capital started with a great future for the Indian economy.
During this era, the eyes of the International investors started to glance over the Indian markets to explore the Venture capital industry. The first foreign institute level of venture capital to enter was William Draper. In 1994, Draper and Robin Richards Donohoe founded Draper International, the first US venture capital fund to focus on investing in private companies with operations in India. Since the Indian government was trying to attract FDI (Foreign Direct Investment) to boost the economy, one of the severe methods was to help the start-ups with the foreign funds; thus, Draper with the help of SEBI started investing in India. Draper when Interviewed in 2005
“We picked India because it was a big complicated country, so is China, but democracy and the rule of law, China doesn’t have that. Very entrepreneurial people and very good technology. In India, they speak English and that was a big plus, because if you’re doing a private deal, you know, if you’ve got to work through an interpreter, that is really tough, so that was a big plus. But that in turn helped India to become the biggest exporter of software other than the US at a time when software was very small, you know, just beginning. But it had to jump over China because of that, and we wanted to go into software primarily, or IT stuff, intellectual properties, the Internet technology, and so on. We ended up with a really good decision. But I had a lot of people who said, God, they didn’t trust the Indians, they are a lot of thieves, lost money every time they worked with them, and stuff like that. But it’s just like every other new part of the world, if you go in as a novice, you have to God, if you go in as a novice, you have to be careful and select somebody that you trust that then helps you select other people. And we did get two very good partners in India. Garnaut Karne and Abbey Havaldar. And, you know, it became easier and easier as we learned more about what they were about, what their biases were and what their weaknesses were — one of them did and the other didn’t know anything about venture capital.” (Draper, 2005)The presence of Draper International in India leads the way to new International venture capital to enter India. During this era, the new regulations made Foreign Venture Capital Investors register with SEBI.
The new trouble has risen, and it is the Recession of 1999 – 2001 due to the year 2000 scare. Computer users and programmers feared that computers would stop working dates beyond December 31, 1999. This recession led to a massive drop in sales of computers and software, just to conclude there was a significant problem in the tech industry. Even the Dot-com bubble made an impact on this recession. In this period, the boom of Venture Capital had slow down by taking a step back. Many of the Venture capital firms either shut down or making changes like focusing on investing in exiting successful companies and particularly avoiding risk start-ups companies highly until 2002.
After slowing down of impact of the recession, there was the emergence of the successful emergence of India-centric Venture Capital firms. Also, NASSCOM has reported that by 2007 – 2008, the Venture Capital disbursement will reach the US $10 billion per annum.
The table 1 below briefly describes the evolution of Venture Capital in India by categorizing into four phases, which not only has the total amount of fund Invested and the number of funds but also the primary focus of specific stage of the start-ups or type the sector that Venture Capital invested during the particular phase.
The table 1 has simplified the whole evolution of the Venture capital industry in India, including the number of funds invested and the number of funds before 1995 to 2005
Phase Ⅰ |
Phase Ⅱ |
Phase Ⅲ |
Phase Ⅳ |
|
Pre-1995 |
1995-1997 |
1998-2001 |
2002-2005 |
|
Total Funds:($ m) |
30 |
125 |
2847 |
5239 |
Number of Funds |
8 |
20 |
50 |
75 |
Primary stages and Sectors |
Seed, Early-stage and Development – Diversified |
Development – Diversified |
Early-stage and Development- Telecom and IT. |
Growth Maturity – Diversified |
Primary sources of funds |
World Bank, Government |
Government |
Overseas Institutional |
Overseas Institutional |
Table 1:The table has been adapted from Dossani and Desai (2006), p-24.
Categories of venture capital in India
Stage based Investment in India
After the general idea of stages commonly followed worldwide. Since this study is primarily focused on Indian geographical location. The Inc42 Media reports the stage wise investment in India during 2018 is shown in the figure 5 indicating with the amount of US dollars invested at a particular stage, as per the observation of figure stages as named with bridge funding for Series A, Growth stage for Series B and Late-stage for Series C. Series
Analyzing the investment stage of portfolio companies is a critical part of the decision-making process during Investment for the portfolio companies since ceratin levels of risk factor varies for each stage of the funding. Based on figure 5, Series C has highest amount funding compared to others stages.
Figure 5: Indian stage-wise funding in 2018. (Inc42 Media, 2018)
Industry based Investment in India
Figure 6: Indian industry-wise funding in 2018. (Inc42 Media, 2018)
Based on the reports of Inc42 Media, Indian Venture capital firms preference of the particular sector of Industry.is presented figure. 6. A high amount of firms are involved in this results report is Tech or Tech related firms. Indication of this treading of the Tech industry in India is an essential aspect for the rise of Venture capital industry in India.
Geographical location based on Investment in India
Figure 7: Indian geographical location wise investment in 2018. (Inc42 Media, 2018)
High level of industrial activities happening in a particular region or a location, attracting human capital, innovation, and growth of real estate. Indeed this brings a concentration of the Venture capital firms. Analyzing the figure 7 indicates that Bengaluru has obtained a tremendous amount of funding compared to several other cities in India. Bengaluru is known as The Silicon Valley of India. These Start-up hubs play a prominent role in attracting Venture Capital firms.
Performance of Venture Capital and their Investment portfolio companies.
In this generation of the highly competitive world, the best way to successfully survive the firm is to run the firm most efficiently. To stay efficient, one should require skill or strategy, which is to get updated with performance. Performance is a measure of how well a firm can use the assets from its primary mode of business and generate revenues, especially in the financial sector, also known as financial stability or financial health. Different financial measures can be used in order to evaluate the performance of a company. Some of the standard financial measures are: revenue, return on equity, return on assets, profit margin, sales growth, capital adequacy, liquidity ratio, and stock prices, among others. (Qaiser Munar, 2015).The measure of performance has a direct and substantial impact on Venture Capital firms. Since the risky factor of the investment industry is very high.
Figure 8;Money talks,Gil Ben-Artzy, 2016
The success ratio in the venture capital industry is quite less, but even in a group of successful returns category, there are multiple areas where the returns calculated based times of return invested. According to Gil Ben-Artzy, Venture capital fund return is more than three times the fund invested is just 5%. Fifty percent of the venture capital fund return is less than one time of the fund invested.
Factors influencing the Investment.
In an Investment, various factors play a vital role in order to obtain the decision on Investment in the way to reduce possible risk.
Either way risk in Investment is absolute but understanding and making familiar with factors influencing the Investment is one of the solutions to reduce the known risk in the end.
Financial performance
In addition to globalization, competitiveness is an essential issue among policymakers of different levels (country, Industry, and company) in different parts of the world (Shorcheloo, 2002). What is essential in the competitiveness of an organization is the organization’s ability to act and react within the competitive environment. The business performance involves customer performance (satisfaction and customer loyalty) and market performance (sales volume and high market share) and financial performance (profit and return compared competitors). In order to measure business performance, seven indicators and in the form of two categories of marketing performance and financial performance have been used. Marketing performance includes Customer return, customer satisfaction, and trust. Financial performance includes return on Investment, return on sales, sales growth, and market share. Cheng et al. (1999) showed that in many services such as banking and medicine in which a two – way transaction process is conducted directly between employees and customers, Market orientation has a significant effect on performance.
Much of the research has examined the effect of marketing on business performance on the domestic market. Kim (2003) investigated a relationship between market orientation and business performance in an international space. The results of this study show that the firm’s specific factors (including the firm size and subjective experience), competitive strategies (general cost leadership strategies, distinction, and focus ), market factors (including market growth and competition intensity), and interfering environmental factors (including market chaos, technological chaos, competition intensity, and market growth), influence the relationship between market orientation and business performance on international markets. More international experience creates higher performance.
Performance Measurement
In the Investment industry, the total results of the performance of Investments of a particular firm are measured based on the returns of the Investment. Returns of Investment analyzed in many possible methods, but Return on Investment (ROI) is a significant method to analyze the return of the Investment.
Return on Investment (ROI) is a concept of performance in any form of Investment; for shareholders, the ultimate goal of the company is expressed in Return on Investment. Return on Investment is an indicator that shows to which extent a specific business produce gain from the use of capital. It shows the extent to which the amount invested in a particular action returns as profit or loss. (Zamfir, Mariana & Manea, Marinela & Ionescu, Luiza., 2016)
As the formula of Return on Investment indicates the amount gained or profits from the Investment made is the Investment gained and the amount which are invested is also known as the Investment base.
Internal Rate of Return (IRR): In more specific terms, the IRR of an investment is the discount rate at which the net present value of costs (negative cash flows) of the Investment equals the net present value of the benefits (positive cash flows) of the Investment. (Yassin El-Tahir, Derar El-Otaibi, 2014)
Since the internal rate of return is primarily based on the Investment’s cash flow and Venture capitalists or Investors seek to reinvest cash flows, Internal rate of return will be misrepresentative if Venture capitalists or Investors not able to bring the same set of internal results.
Different approaches to performance evaluation
To evaluate the performance of companies, different approaches are used and the most important of these approaches can be divided into four categories as follows.
· Accounting data, such as profit, return on equity capital, sales change process.
· The financial management data, such as return, stock return, capital market equation, and asset pricing model
· The economic data including the economic value-added, adjusted economic value added
· The mixed data is the combination of the market value and accounting information. As with the ratio of P / E, the price to profit ratio, the ratio of Tobin’s Q and the ratio of the market value to the book value of each stock (Shoorcheloo, 2002)
Performance evaluation models
The users of financial reporting are using differe
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