SUMMER INTERNSHIP PROJECT WORK ON

“The Venture Capital Financing – Factors

affecting the capital decisions of Entrepreneurs”

THE PROJECT SUBMITTED TO THE

UNIVERSITY OF MUMBAI
IN PARTIAL FULFILLMENT OF THE
REQUIREMENT FOR THE AWARD OF DEGREE OF
MASTER OF MANAGEMENT STUDIES (MMS)

BY
Rahul Sanjay Borhade

F-309

PARLE TILAK VIDYALAYA

ASSOCIATION’S PTVA’S INSTITUTE OF
MANAGEMENT VILE PARLE (E), MUMBAI
– 400 057.
2020-2022
 CERTIFICATE

I Mrs. Aparna Patil hereby certify that Mr. Rahul Borhade MMS Student of
Parle Tilak Vidyalaya Association’s PTVA’s Institute of Management, has
completed a project titled ‘The Venture Capital Financing – Factors effecting
the capital decisions of entrepreneurs’ in the Academic Year 2020-21. The
work of the student is original and the information included in the project is true
to the best of my knowledge.

Mrs. Aparna Patil Dr. Harish Kumar S.

Purohit Faculty Guide Director

 DECLARATION

I, Mr. Rahul Borhade MMS Student of Parle Tilak Vidyalaya

Association’s PTVA’s Institute of Management, hereby declare that I have

completed the project titled “The Venture Capital Financing – Factors

effecting the capital decisions of entrepreneurs” during the Academic Year

2020-21.

The report work is original and the information/data and the references

included in the report are true to the best of my knowledge. Due credit is

extended on the work of Literature/Secondary Survey by endorsing it in the

Bibliography as per the prescribed format.

 ACKNOWLEDGEMENT

It is a matter of great satisfaction and pleasure to present this summer internship

report on “The Venture Capital Financing – Factors effecting the capital

decisions of entrepreneurs”. Firstly, I am extremely grateful to my mentor and

project guide Mrs. Aparna Patil for her guidance, discussion and critical

assessment of the project.

I am also thankful to my institute Parle Tilak Vidyalaya Association’s PTVA’s

Institute of Management for giving me an opportunity to undergo this learning

experience. PTVAIM has given me access to Turnitin, an internet-based

plagiarism detection service which helped me check my project for similarity

and deter any occurrence of plagiarism so that I could follow all the norms set by

our institutes ‘Internal Plagiarism Policy’. I wish to acknowledge my project

guide for his/her valuable suggestions and support while using Turnitin and

bringing down the similarity report to desirable levels.

Finally, I take this opportunity to express my sincere gratitude to all those who

have directly or indirectly helped me in completing my project work.

 TABLE OF CONTENTS

Sr. No Particulars Page No

1. Executive Summary 1

2. Introduction 2

3. Literature review 4

4. Objectives 6

5. Scope of Study 6

6. Industry Overview 7

7. Research methodology 12

8. Company Profile 13

9. Data Analysis 15

10. Statistical Tools 16

11. Findings 21

12. Conclusion 22

13. References and Bibliography 22

14. Annexure 23
 EXECUTIVE SUMMARY

“The Venture Capital Financing - Factors effecting the capital decisions of

Entrepreneurs”

I have been able to study venture capital financing and prepare this project report on
the factors involved while taking capital decisions on a potential project by a
venture capitalist. (Present financial condition, potential of the venture, Cost of
financing, ownership, organization structure and management, existing customer
base, size and tenure). Most Entrepreneurs have Lack of understanding about the
fundraising process. They are unable to look from investor’s perspective – What is
the opportunity for them, how big is this market, what does the competitive
landscape look like, how much market share can this business get, what exit
outcomes can be excepted based on other similar transactions in this industry, what
are the risks?

Most of the entrepreneurs fail to forecast these factors in a required manner that is
demanded by the venture capitalist for their analysis, thereby losing their chances of
getting approved by a VC and missing the opportunity of funding their potential
venture idea.

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 INTRODUCTION

Venture capital (VC) is a form of private equity funding that is generally provided to start -ups
and companies at the nascent stage. VC is often offered to firms that show significant growth
potential and revenue creation, thus generating potential high returns.

Business requires capital, and getting it at the right time is very important. There are several

alternatives to fund the business. A brief heading to name a few would be:

• Owner or proprietor’s capital

• Equity partner

• Debt Finance

These can be further be branched to many options giving entrepreneur several options to choose
among. In this study the focus would be more on venture capital which comes under equity partner
as well as under debt financing.
Venture capital is a risk financing in the form of equity or quasi-equity. It gives the business funds
based on their potential and their interest as perceived by the investor. Funds might be required for
seed stage funding, expansion/development funding or for acquisition financing. Venture capital is
established among developed countries and is developing in third world countries because of its
impact on encouraging entrepreneurial activities within a nation. Venture Capital firms invest funds
on any business with a professional outlook, they focus on their primary segment which vary among
different specializations (e.g., e-commerce, Oil & Gas, Healthcare, Manufacturing, Health/life
sciences, etc.)" Venture capital in India today has three forms

• Equity

• Conditional loans

• Income notes
The number of venture capital firms are raising in India due to the well-developed avenues for
buying and selling of shares within SME’s, huge tax benefits for the venture capitalist and
support from government policies. Venture capital plays a strategic role to build potential
business/enterprises to reach a level where they can reap their capital gains and can cash out
these gains by leading directing their financed venture to any of the following exit routes:

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 • Initial public offerings (IPO)

• Acquisition by other company

• Purchase of venture capitalist’s share by other investors or promoters

This is done when the Venture capitalist realizes the required return of return on his primary

capital invested on the business to take the exit route. Venture capital financing helps both the

entrepreneurs as well as the venture capitalist to realize their goals.

With venture capital financing, the venture capitalist acquires an agreed proportion of the equity

of the company in return for the funding that he offers.

This could be summarized as follows:

• Equity participation

• Long term investment

• Participation in management

The rate of return on this capital lies within the success of the business venture. Venture capital
Equity finance thereby offers the advantage of having no interest charges. It is "patient" capital that
seeks a return through long-term capital gain rather than immediate and regular interest payments, as
in the case of debt financing. Given the nature of equity financing, venture capital investors are
therefore exposed to the risk of the company failing. As a result, the venture capitalist must look to
invest in companies which have the ability to grow very successfully and provide higher than
average returns to compensate for the risk.

Venture capitalist’s management approach differ to that of a lender or a bank. The bank does not
participate with the management and keeps its ties away from the venture’s management, operations
and other decision making. When venture capitalists invest in a business they typically direct and
guide the venture so as to lead it towards capital gains. They are a crucial part of the company's
decision making and occupy a place in board of directors. These professional venture capitalists act
as mentors and aim to provide support and advice on a range of management, sales and technical
issues to assist the company to develop its full potential.

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 LITERATURE REVIEW:

Small and Medium Enterprises (SMEs) have historically played a dominant role in the industrial
evolution of both developed and developing countries.

Berger and Udell (1998) believe that 'this focus stems from the belief that innovation - particularly
in the high tech, information, and bio-technology areas - is vitally dependent on a flourishing
entrepreneurial sector Against this background, this segment of the economy has faced acute
problems in setting up new ventures and funding expansion - Chapter III discusses this in greater
detail.

Reid (1998) argues that an attempt to solve this problem through higher gearing increases exposure
to risk, and may create vulnerability to debt-servicing crises. He further mentions the typical
collateral related constraints and also the possibility of the lenders making a severe, pre-emptive
move to force the enterprises into liquidation in case of a looming repayment crisis.

Zider (1998) Venture capitals niche exists because of the structure and rules of capital markets'
Commercial banks and other lending institutions require an established track record and collateral
before considering any application for funds. This attitude of financial institutions has always left a
funding gap for potentially viable ventures with either insignificant collateral to offer or little history
of success. Therefore, 'risk sharing and lack of funds drive entrepreneurs to seek venture financing'

Folster (2000) argues that many countries support the creation of new firms, based on the
presumption that the total number of jobs increases when a person moves from unemployment or
regular employment to self- employment. Small firms have made a significant contribution in
introducing innovative products, generating employment, payment of taxes to the Exchequer and so
forth. Thus, their share in the Gross Domestic Product has invariably been vital. Applauding the
role of entrepreneurial enterprise as an engine of economic growth and the considerable public
attention they garnered in the 1990s,

Biekpe (2001) Venture capitalists provide equity financing rather than loans to young companies in
exchange for part ownership of the company. Thus, entrepreneurs avoid interest payments and can
achieve profitability more quickly. Once they invest, venture capitalists actively work with the
company's management by contributing their business experience and industry knowledge gained
from helping other young companies (Biekpe, 2001).

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Gompers and Lerner (2001) brought together the empirical research on venture capital activity in
terms of its sources of funding, venture capital investments distributed across industries and regions
in US. High technology companies, successful IPO exits, corporate collaborations were the
important factors which led to changing trends in venture capital activity in the country. Fundraising
activity was affected by capital gain tax rates, policy changes, vibrant public market whereas venture
investing is characterized by strategies like staged capital infusions, monitoring and syndication
practices by venture capital firms.

Subhash and Nair (2004) described the evolution of venture capital financing throughout the world
to promote new ideas proposed by the entrepreneurs and how it contributed to the economic
development of the various developed and developing countries of the world.

Swati Deva (2008) analyzed the contributing factors to the growth of venture capital industry in
India - namely the economic and legal changes in the country. She highlighted the existence of
several rules and regulations in India to monitor the operation of venture capital investments in the
country along with favourable tax reforms for both domestic and foreign venture capital investors.
The study also figured out the weakness in terms of providing a better market for early-stage
investments and suggested that the preparing of a manual for domestic and foreign venture
capitalists will make the investment market grow faster and make the investment decisions easier.

Thillai and Kamat (2012) also observed the differences in the investment patterns between
domestic and foreign venture capital investors in India. The analysis revealed that the foreign
investors invested more and also made larger investments than domestic investors. In terms of deals,
foreign firms had a higher proportion of high value deals when compared to domestic investors
which had a higher proportion of low value deals. While analyzing the stages it was observed that
the proportion of early-stage deals is consistently higher for domestic firms when compared to
foreign firms. Sector wise analysis revealed that foreign firms invested mainly in technology and
services sector whereas the domestic firms invested in manufacturing sectors.

Srinivas K T (2013) using survey data on 20 Venture Capital funds of 12 domestic Venture Capital
firms located in Karnataka for a period of 15 years from 1998 to 2012 studied the focus of venture
capital funding in different sectors of Karnataka, India and concluded that Venture Capital firms are
giving more prominence to service sectors like BFSI, IT and ITES, Media and entertainment,
Healthcare and Life Sciences which are knowledge intensive in nature and promotion of these
sectors will create a boom for the Indian economy.

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Komala (2014) studied the growth of venture capital investments specifically in the early and growth
stages of development by analyzing the correlation between the number of deals and the value of
deals for the period 1998-2012. The results revealed a strong correlation between the number of
deals and the value of investments. There was also clustering of venture capital investments in the
southern and western regions of the country with more flow of venture capital going towards service-
related industries like IT, Education, Healthcare rather than manufacturing industries.

OBJECTIVES:

• To understand the right method to reach to a venture capital firm with the
required financial presentation and business plan.

• To understand about the working of Venture Capital Financing and data required by
them.

• To study the sources and allocation of Venture Capital Financing.

SCOPE OF THE STUDY:

The scope of the study was to realize the funding lifecycle in a practical format, by preparing

business case for entrepreneurs and help them seek a VC. To realize the theoretical aspect of

the study into real life work experience by analyzing the financials of the venture and guiding

business finance to them. The study of financials and possible funding that could be approved

is based on the tools such as Size wise analysis and Ratios. The study is based on the last 5

years Annual Reports of venture capital firms and fund seeking ventures.

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 INDUSTRY OVERVIEW

✓ INTRODUCTION TO THE VENTURE CAPITAL INDUSTRY:

Initiative in India:

Indian tradition of venture capital for industry starts with a history of more than 150 years.
Back then many of the managing agency houses acted as venture capitalists providing both
finance and management skill to risky projects. It was the managing agency system through
which Tata iron and Steel and Empress Mills were able to raise equity from the investing
public. The Tata’s also initiated a managing agency system, named Investment Corporation of
India in 1937, which by acting as venture capitalists, successfully provided hi-tech enterprises
such as CEAT tyres, associated bearings, national rayon etc. The early form of venture capital
enabled the entrepreneurs to raise large amount of funds and yet retain management control.
After the abolition of managing agency system, public sector term lending institutions met a
part of venture capital requirements through seed capital and risk capital for hi-tech industries
which were not able to meet promoter’s contribution. However, all these institutions supported
only proven and sound technology while technology development remained largely confident
to government labs and academic institutions.

Many hi-tech industries, thus found it impossible to obtain financial assistance from banks and
other financial institutions due to unproven technology, conservative attitude, risk awareness
and rigid security parameters. Venture capitals growth in India passed through various stages. In
1973, R.S. Bhatt committee recommended formation of Rs. 100 crore venture capital funds.
The seventh five-year plan emphasized the need for developing a system of funding venture
capital. The Research and Development Cess Act was enacted in May 1986, which introduced a
cess of 5 percent on all payments made for purchases of technology from abroad. The levy
provides the source for the venture capital fund. Formalized venture capital took roots when
comptroller of capital issues venture capital guidelines in Nov 1988.5

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 ➢ GROWTH OF VENTURE CAPITAL INDUSTRY:

Up to 1996: The Early Years:

• Funds that were mobilized for venture investment were small in value.
• The venture capitalists in those times were mostly from a banking background.
• Banks approached the subject of venture funding much likely they approached debt
financing of a project.
• The accent was on the asset-side of the balance sheet. And the focus on
innovation and business building was low.
• Value creation as a focus had not yet been fully discovered, and exit strategies
were being thought more around the life-term of the fund.
• Valuations were low.
• No competition between VCs.
• Indian entrepreneurs had not yet discovered the venture capital route to funding and
growth and it reflected in the small amounts that were invested.
• There was little or no active participation of venture capitalists in entrepreneurial
activities such as financial structuring, business strategy.
• Business enhancement through networks.

1997 to 2000: The Rock ‘n’ Roll Years:

• The SEBI guidelines of 1996 acted as huge incentive for

institutional acked MNC venture capital companies to focus their
attention on India.
• The range of venture capitalists now spanned incubators, ingents, classic venture
capitalists and even private equity players. And the lines between them had begun
to blur.
• Venture capitalists were instrumental in introducing risk taking too many,
members of the professional class.
• Innovation was the key, and idea flows equalled doer flows at a frantic pace never before seen.

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2001 Onwards: The Reality Years:

• The number of people who had got in to venture capital game was truly impressive.
• In addition to the seasoned players, there were finance and noon finance
professionals of different hues entering the industry and people with little or no
experience running the companies.
• Venture capital community is finally recognizing that the evolution and business is an
on-going process. This added to the return of the business maturation cycle of five to
seven years, portends a less frenetic and more sustained pace of venture activity.

➢ PROBLEMS IN THE VCs IN THE INDIAN CONTEXT:

One can ask why venture funding is so successful in USA but faced a number of problems in
India. The biggest problem was a mindset change from ‘collateral funding’ to high-risk high
return funding. Most of the pioneers in the industry were people with credit background and
exposure to manufacturing industries. Exposure to fast growing intellectual property business
and services sector was almost zero. All combined to a slow start to the industry. The other issue
that led to such a situation includes:

✓ MINDSETS:

Venture capital as an activity was virtually nonexistence in India. Most venture capital companies
went to provide capital on a secured debt basis, to established businesses with profitable
operating histories. Most of the venture capital units were off-shoots of financial institutions and
banks and the lending mindset continued. True venture capital is capital that is used to help
launch products and ideas of tomorrow. Abroad, this problem is solved by the presence of angel
investors. They are typically wealthy individuals who not only provide venture finance but also
help entrepreneurs to shape their business and make their venture successful.

✓ EXIT:

The exit routes available to the venture capitalists were restricted to the IPO route. Before
deregulation, pricing was dependent on the erstwhile CCI regulations. In general, all issues were
under period. Even now SEBI guidelines make it difficult for pricing issues for an easy exit.
Given the failure if the OTCEI and the revised guidelines, small companies could not hope for a
BSE / NSE listing. Given the dull market for mergers and acquisitions, strategic sale was also not
available.

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 ➢ VALUATION:

The recent phenomenon is valuation mismatches. Thanks to the software boom, most promoters
have sky high valuation expectations. Given this, it is difficult for deals to reach financial closure
as promoters do not agree to a valuation. This coupled with the fancy for software stocks in the
bourses means that most companies are proponing their IPOs. Consequently, the number and
quality of deals available to the venture funds gets reduced.

✓ ADVANTAGES OF VENTURE CAPITAL

• It injects long term equity finance which provides a solid capital base for future growth.
• The venture capitalist is a business partner, sharing both the risks and rewards. Venture
capitalists are rewarded by business success and the capital gain.
• The venture capitalist is able to provide practical advice and assistance to the company
based on past experience with other companies which were in similar situations.
• The venture capitalist also has a network of contacts in many areas that can add value to
the company, such as in recruiting key personnel, providing contacts in international
markets, introductions to strategic partners, and if needed co-investments with other
venture capital firms when additional rounds of financing are required.
• The venture capitalist may be capable of providing additional rounds of funding
should it be required to finance growth.
• Help gain business expertise One of the primary advantages of venture capital is that
it helps new entrepreneurs gather business expertise. Those supplying VC have
significant experience to help the owners in decision making, especially human resource
and financial management.
• Business owners do not have to repay Entrepreneurs or business owners are not
obligated to repay the invested sum. Even if the company fails, it will not be liable for
repayment.

✓ DISADVANTAGES OF GOING TO VENTURE CAPITAL FINANCE:

• The agreement of funding is passed on a contract which could be partial ownership or

other profit sharing which if not properly negotiated by the entrepreneur he might lose
ownership of his whole business or idea and future to them.

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 • Give rise to a conflict-of-interest Investors not only hold a controlling stake in a start-
up but also a chair among the board members. As a result, conflict of interest may
arise between the owners and investors, which can hinder decision making.

• Receiving approval can be time-consuming VC investors will have to conduct due

diligence and assess the feasibility of a start-up before going ahead with the
investment. This process can be time-consuming as it requires excessive market
analysis and financial forecasting, which can delay the funding

• Intrusion and control: the VC get the right to drive the firm thereby can take strategic
decision or can drive them to his advantage if the deal is not guided properly.

✓ CONTRIBUTORS TO THE VENTURE FUND:

• Foreign Institutional Investors.

• All India Financial Institutions.
• Multilateral Dev Agencies.
• Other Banks.
• Other Public.
• Private Sector.
• Public Sector.
• Nationalized Banks.
• State Financial Institutions.
• Insurance Companies.
• Mutual Fund.

➢ FACTORS DETERMINING THE VENTURE CAPITAL

REQUIREMENTS:

Nature of business: The requirements of working is very limited in public utility undertakings such as

electricity, water supply and railways because they offer cash sale only and supply services not

products, and no funds are tied up in inventories and receivables. On the other hand, the trading and

financial firms requires less investment in fixed assets but have to invest large amt. of working capital

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along with fixed investments.

Size of the business: Greater the size of the business, greater is the requirement of working capital.

Length of production cycle: The longer the manufacturing time the raw material and other supplies

have to be carried for a longer in the process with progressive increment of labor and service costs

before the final product is obtained. So, working capital is directly proportional to the length of the

manufacturing process.

Seasonal variations: Generally, during the busy season, a firm requires larger working capital than in

slack season.

Working capital cycle: The speed with which the working cycle completes one cycle determines the

requirements of working capital. Longer the cycle larger is the requirement of working capital.

Business cycle: In period of boom, when the business is prosperous, there is need for larger amt. of

working capital due to rise in sales, rise in prices, optimistic expansion of business, etc. On the

contrary in time of depression, the business contracts, sales decline, difficulties are faced in collection

from debtor and the firm may have a large amt. of working capital.

RESEARCH METHODOLOGY:

Field study was carried out and it was analyzed by Cross tabulation and chi-square
statistics were utilized to verify the interrelationships between the different respondents
and the responses they provided. To find the correlation among the factors Regression
Analysis was also done. Pearson correlation coefficient was found to be positive at a
significance level over 0.5 which indicates a strong correlation.:

Primary sources include survey with a sample of 100 respondents. A well-structured

questionnaire was used for primary data where questionnaire was offered by multiple
choices.

Secondary Sources were articles, journals, past records from Funding Solutionz, books
and internet sources.

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 COMAPNY PROFILE

Matrix Partners INDIA was established in 2006. Led by General Partners Avnish Bajaj and Rishi
Navani. It is a private equity investment firm focusing on venture capital investments. Early-stage
investors based in Mumbai, Bangalore and Delhi. The firm invests in seed and early-stage companies
in India, particularly in the software, communications, semiconductors, data storage, Internet or
wireless sectors.

History: Founded in 1977, Matrix was an active player in the development of the venture capital
industry in the 1980s. In 1985, Matrix raised its first institutional private equity fund. In 2001, Matrix
Partners completed fundraising for Matrix Partners VII, a $1 billion venture capital fund. In 2006,
Matrix raised Matrix Partners VIII fund, with $445 million of investor commitments. In 2006, Matrix
also raised a separate $150 million India fund.

Matrix Partners India has made 151 investments. Their most recent investment was on Sep 28, 2021,
when Bijnis raised ₹2.2B. Matrix Partners India has had 10 exits. Matrix Partners India's most notable
exits include &ME, Just Dial, and ShopClues. Their Current Investments include B2B
Commerce/Agri, D2C, Ecommerce & marketplaces, Edtech, Enterprise & SaaS, Fintech, Healthcare,
Media, social, gaming Mobility/Travel.

WHAT THEY LOOK FOR?

They are looking for the best and brightest founders and teams. In their experience, the quality,
passion and commitment of a company's core team are more important than any other element.

WHEN TO REACH OUT?

They invest between seed and series B initially in each company. They like to get to know founders
early, ideally well before they are ready to raise capital.

HOW THEY INVEST?

They invest in companies primarily targeting the Indian market. They prefer to be the lead investor.
They often invest on our own but also co-invest with other investors.

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 ➢ VENTURE CAPITAL WORKING

o STAGES OF FINANCING:

Stages of Financing Time (Years) Uses for the Finance

Financing needed to prove an idea and bring a

Seed money stage concept or develop it (could be a service or

7 – 10
a product)

Financing needed to develop the start up with

Start-up financing better market penetration through promotions

5 – 10
marketing and other product development

technique

Funds for taking care of working capital for a

Second round financing firm, that is still losing money though have
3–7
its products or services out in market.

Financing for a firm that is breaking even and

Third round financing has a strong venture thereby is

1–3
contemplating an expansion project.

Financing firms that are planning to

Fourth round financing go public, (bridge financing).

1–3

1–3 Financing a firm for its acquisition activity of a

Buy-out product line or service business.

Turnaround 3–5 Re-establishing a business

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 DATA ANALYSIS

➢ KEY FACTORS EFFECTING THE INVESTMENT DECISIONS OF AN INVESTOR:

Descriptive Characteristics

The survey covers all factors with a scale of one to five. One been the least and five been the maximum.

The survey is done to check the rank of factors effecting the decision making of an investor. Here the
respondent’s rank

• Business Plan
• Financials
• Management
• IRR Conditions
• Pay Back period
• Timeline

The result of the survey is as shown below for the given 100 respondents:

Table: Respondent Analysis

Business Payback
Scale Financials Management IRR conditions Timeline
Plan period

1 5 3 1 9 6 4

2 17 12 11 17 17 10

3 20 23 31 21 29 22

4 26 31 27 33 32 34

5 32 31 33 20 16 30

TOTAL 100 100 100 100 100 100

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 STATISTICAL TOOLS

✓ Reliability Test
Cronbach’s alpha is the coefficient of reliability which shows how closely the items are related
in the group. The Cronbach's Alpha Value > .8 shows the responses are reliable. The Cronbach’s
Alpha value observed was 0.887 which is greater than 0.7 hence the variables for the study
showed reliability.

✓ Variables

The independent variables used here are Business plan, Financials, Management, IRR
Conditions, Payback period and dependent variable is Venture Capitalist financing decision

✓ Hypothesis

H0: Business plan, Financials, Management, IRR Conditions, Payback period does not affect the
Venture Capitalist financing decision.
H1: Business plan, Financials, Management, IRR Conditions, Payback period does affect the
Venture Capitalist financing decision.

✓ Confidence Interval

The confidence associated with an interval estimate is at 95%.

✓ Decision Rule

Since Observed value is less than Critical value (at 95% confidence interval value alpha
is .05) Ho is rejected.
Hence the hypothesis is proved that the venture capital financing is dependent on the factors like
Business plan, Financials, Management, IRR Conditions, Payback period.

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 ➢ RANKING OF FACTORS EFFECTING THE DECISION MAKING BY VENTURE
CAPITALISTS:

Documents Rank

Management 1

Business Plan 2

Financials 3

Timeline 4

IRR method 5

Pay Back Period 6

Chart Title
40

35 34
33 33
32 32
31 31 31
30
30 29
27
26
25 23
22
21
20 20
20
17 17 17
16
15
12
11
10
10 9
6
5
5 4
3
1
0
Business Plan Financials Management IRR conditions Payback period Timeline

1 2 3 4 5

As per the above ranking and chart on the maximum scale it states that, 33 respondents feel like
Management is the priority factor for investors while making a decision, followed by Business plan with 32
respondents then financials with 31 respondents after those 30 respondents suggest that Timeline being the
four highest factors while 20 and 16 respondents say IRR conditions and Payback period being the priority
factor on the ranks respectively.

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 ➢ VENTURE CAPITAL PREFERENCE – STAGE OF VENTURE

Stages of Venture Percentage %

Start-up 40

Seed Stage 30

Expansion 20

Turnaround 10

✓ INTERPRETATION:

Majority of venture capitalists in India and as observed from literature records on internet prefer
providing finance to start-ups with a seeding stage though providing finance involves high risks, but
never the less promises high returns.
Seed stage financing is difficult to execute as it involves great effort not for making the project take-
off. The management further also is responsible for constant monitoring and supporting the project.
Expansion and Turnaround stage covers 20% and 10% respectively, as at these stages conventional
finance is available and even there is a very limited exit option for venture capitalists.

STAGES OF VENTURE
Turnaround
10%

Expansion Start-up
20% 40%

Seed Stage
30%

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 ➢ DOCUMENTATION NEEDED BEFORE SEEKING VENTURE
CAPITAL:

To a Venture Capital firm, a company with anything less than $5M and more importantly a
sustainable growing pattern of profitability, is still a startup. In any case, the documents needed to get
an introduction to a Venture Capital firm and to proceed to the point of negotiating the terms of the
investment are going to be the same. There is a defector industry standard on what the Venture
Capitalists expect to see at each step of the process. The content of those documents and the proof the
entrepreneur offers that the company has the ability to become a large thriving company in a relatively
short period of time will dictate the likelihood of attracting Venture Capital financing.

The documents needed are straight forward and vary only in the depth of content. The basic elements
are same throughout:

• Introduction summary of what you do and why. 2-3 sentences that includes your key
differentiator or hook, like an elevator pitch in writing.
• The problem you are solving, from a brief statement of fact to more in-depth reference points
of why it is a problem.
• How you are solving it and why your solution is unique. As it expands from exec summary to
a business plan it would include a competitive landscape and how you fit.
• Your business model, which in a pitch or summary document may be simple straight forward
couple of sentences, expanding in the business plan to include sales and marketing strategy.
• Your management team that goes from names and titles in the summary doc to short bios to
full resumes as you get to the due diligence process.
• Your financial projections should be a basic top line, bottom line to show revenues, expenses,
and profits on a one-page document. For the business plan it should be an expanded version
with the first 12 months in one table and year 2-5 summarized in another table. For due
diligence they will want to see the full financial model.
• Your financing request and use of funds. Basic bullet points in an executive summary but as
you expand to the due diligence portion, you may need to have a 90-day plan for after receipt
of funds and project plans for development timelines and operational milestones.
• During due diligence and negotiation additional documents will be requested. Venture Capital
firms typically provide all legal closing documents.

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 ➢ INTERPRETATION FOR FACTORS PREFFERED BY VC BEFORE
INVESTING IN A VENTURE:

• An innovative project is essential but within realistic and logical area, venture
capitalists seek any project which promises immense growth potential and competitive
ability to succeed and sustain in the market.

• Entrepreneurial personality, experience and his management team contribute towards the
execution and success of the project, since they utilize the VC’s fund the venture
capitalist make sure of their major role with managing, working, guiding and co-
coordinating the team towards the right path.

• International markets for the project also assume importance in the present situation
where no barriers exit for entry all can complete in one place and the success of the

• Project depends on facing competition not just in the local market but also in the global
market.

• Good Team work, the mantra for modern success stories in the market, holds good for
venture capital funding too.

• Market Characteristics covers the marketability of the product and the competition it faces
from other competitors. Returns in the short period depend on the market characteristics of
the project- hence it is importance as a major criterion in decision making for capital
funding.

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 FINDINGS

• Venture capital has become a part of the popular business in India. Venture capital has
also become synonymous with investing in high-risk technology businesses, that could
be majorly IT and can spread across further domains like healthcare, agriculture etc.

• The VC’s final decision on a proposed venture is based on many criteria and also it differs
from one to other. All seek one common thing the right and proper way of documentation
for them to analyses the projects faster and easily.

• If the project is new, promising and has innovative features then VCs seek to have more
interest and are ready to help with more amounts because of its wide market
characteristics and its ability to capture the market.

• Many SME’s usually lack the right method and technique to approach the suitable
VC and thereby they seek consultants to seek funds in the start-up stage through
financial institution.

• SME firms in India believed that ownership of the company is compromised with the
price paid for VC funds

• The preference for investing venture capital is given to start-up stage may be
because of innovativeness of the project and a good team. It is found that less
preferences are given for expansion and turnaround stage of the venture.

• Due to the formal structure of the VC operation and more stringent evaluation
process, complete business plans are compulsory.
• The Internal Rate of Return is more when risk is high. 40 percent of the people don’t
want to take high risk and hence they are satisfied with moderate returns of 20-25
percent. Only 20 percent of the people are taking risk expecting high returns.

• The venture capital investment is made adequate on IT, Banking, Media and
construction but investment is inadequate in Telecom, Energy, Resorts and Healthcare.
For overall development adequate investments must be made in all the sectors.

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 CONCLUSION

The money invested in late stage is more utilized as compared to any other stage. The reason is, in
late stage the firm will be well established, has good brand name and loyal customers and hence
the money invested is used to promote the product and is fully utilized. The risk is more in the
early stage as the product is new to the market and requires huge capital to promote the product.
Similarly, the risk is less in the late stage where the firm is well established and risk of losses
moderate in the growth stage.

Equity shares are much preferred since high returns can be earned. It also ensures active participation
in management and also ownership. Equity shares are preferred since no fixed interest is given to
shareholders; the dividend depends on the profit of the firm. Preference shares are less preferred
because a fixed amount is to be paid irrespective of the condition of the firm.

BIBLIOGRAPHY
• “About Venture Capital (VC).” https://www.edupristine.com/blog/venture-capital
• “Legal - Venture Capital-overview.” http://
https://www.syndicateroom.com/alternative-investments/venture-capital.
• “Loughborough University Institutional Repository: Venture Capital Financing in India:
A Study of Venture Capitalist’s Valuation, Structuring, and Monitoring Practices.”
https://repository.lboro.ac.uk/articles/thesis/Venture_capital_financing_in_India_a_stu
dy_of_venture_capitalist_s_valuation_structuring_and_monitoring_practices/9495380
• “Microsoft Word - The VC Handbook -- _Chapter 0-26_ -
PVI.A02_Venture.Capital.Industry.in.India.pdf.”
http://smoothridetoventurecapital.com/PVI.A02_Venture.Capital.Industry.in.Indi
a.pdf.
• “About VENTURE CAPITAL”
http://www.managementparadise.com/forums/miscellaneous-project-reports/11182-
venture-
• “Venture Capitalist.” https://pitchbook.com/blog/what-is-venture-capital
• “Survey.” https://forms.gle/9yzAEeMvPFkwmuvSA

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 ANNEXURE
➢ Questionnaire for the Venture Capitalist:

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