A PROJECT REPORT ON

‘FINANCING IN STARTUPS’

SUBMITTED BY

KARAN RAJDEO

T.Y.B.F.M [SEMESTER V]

DIVISION: A

ROLL NO.: A039

ACADEMIC YEAR

2017-2018

UNDER THE GUIDANCE OF

PROF. POOJA SINGH

DATE OF SUBMISSION

7 TH SEPTEMBER, 2017

SVKM’S NARSEE MONJEE COLLEGE

OF COMMERCE AND ECONOMICS

VILE PARLE (W), MUMBAI- 400056

SUBMITTED TO UNIVERSITY OF MUMBAI

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 CERTIFICATE

I, POOJA SINGH, hereby certify that MR. KARAN RAJDEO of

SVKM’S Narsee Monjee College of Commerce and Economics of
TYBFM [SEMESTER V] has completed the project on FINANCING IN
START-UPS in the academic year 2017-2018 under my guidance. The
information submitted herein is true and original to the best of my
knowledge.

_____________________ ________________________

FACULTY NAME POOJA SINGH

PROJECT GUIDE BFM CO-ORDINATOR

_____________________ _____________________

EXAMINER MR. PARAG AJAGAONKAR

PRINCIPAL

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 DECLARATION

I, Mr. Karan Rajdeo, of SVKM’s Narsee Monjee College of

Commerce and Economics of TYBFM [Semester V] hereby
declare that I have completed my project, titled ‘Financing in
Start-ups (Venture Capital)’ in the Academic Year 2017 –2018.
The information submitted herein is true and original to the best
of my knowledge.

KARAN RAJDEO

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 ACKNOWLEDGEMENT

It has always been my sincere desire as a financial market

student to get an opportunity to express my skills, views,
attitude and talent in which I am proficient. This project has
given me the chance to get in touch with the practical aspects of
finance.

I am extremely grateful to University of Mumbai for having

prescribed this project work to me as a part of the academic
requirement in the Bachelor of Financial Market (BFM) course.

I appreciate SVKM Management and Narsee Monjee College of

Commerce and Economics for providing all the required
facilities. I would like to thank our Principal Dr. Parag
Ajagaonkar for his dynamic leadership. I would also like to
thank the BFM Co-ordinator Mrs Pooja Singh for all her support
and help.

I also wish to thank my project mentor, PROF. POOJA

SINGH for guiding me throughout the project and without
whose support the project may not have taken shape.

Finally, I thank all my friends and family members who have

helped me with the execution of this project.

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 EXECUTIVE SUMMARY

Venture capital is a growing business of recent origin in the area of

industrial financing in India. The various financial institution set-ups in
India to promote industries have done commendable work. However, these
institutions do not come up to benefit risky ventures when they are
undertaken by new or relatively unknown entrepreneurs. They contend to
give debt finance, mostly in the form of term loans to the promoters and
their functioning has been more akin to that of commercial banks.

Starting and growing a business always require capital. There are a number
of alternative methods to fund growth. These include the owner or
proprietor’s own capital, arranging debt finance, or seeking an equity
partner, as is the case with private equity and venture capital.

Venture capital is a means of equity financing for rapidly-growing private

companies. Finance may be required for the start-up,
development/expansion or purchase of a company. Venture Capital firms
invest funds on a professional basis, often focusing on a limited sector of
specialization (eg.IT, Infrastructure, Health/Life Sciences, Clean
Technology, etc.).

Indian Venture capital and Private Equity Association(IVCA) is a member

based national organization that represents venture capital and private
equity firms, promotes the industry within India and throughout the world
and encourages investment in high growth companies.

IVCA member comprise venture capital firms, institutional investors,

banks, incubators, angel groups, corporate advisors, accountants, lawyers,
government bodies, academic institutions and other service providers to
the venture capital and private equity industry.

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 TABLE OF CONTENTS

Sr. No. Particular Page No.

1. Introduction To Project 1

➢ Meaning of Start-up 1

➢ Conditions of a Start-up 1

2. Review of Literature 3

3. Types of Funding in a Start-up 4

➢ Bootstrap 4

➢ Equity Funding 4

➢ Debt Funding 6

4. Venture Capital 8

➢ Meaning of Venture Capital 8

➢ Features of Venture Capital 8

5. Venture Capital Spectrums 12

➢ Start-up Financial Cycle 13

➢ Early Stage Finance 13

➢ Later Stage Finance 13

5. Venture Capital Investment Process 16

➢ Deal Origination 17

➢ Screening 17

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 ➢ Evaluation or Due diligence 17

➢ Deal Structuring 18

➢ Post Investment strategies 18

➢ Exit 19

➢ Promoters Buy Back 19

➢ Initial Public Offerings 20

➢ Sale on the OTC market 21

6. Players in Venture Capital Industry 23

➢ Angel and Angel Clubs 24

➢ Venture Capital Funds 25

➢ Corporate Venture Funds 25

➢ Financial Funds 26

7. Venture Capital in India 27

➢ Evolution of Venture Capital in India 27

➢ Venture Capital industry Life Cycle in India 28

➢ Four Phases of Life Cycle 28

8. Key success factor for venture capital industry 32

in India

9. Opportunities and Threats 35

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8. PAYTM- Case Study 40

➢ Current Scenario 40

➢ Funding Timeline 42

9. OLA- Case Study 45

➢ All about Ola 45

➢ Funding Rounds 47

➢ Investments 49

➢ Acquisitions 50

10. China, India and Israel will be most attractive 51

growth of venture capital

11. Primary reasons for venture capital investors 54

expanding globally

12. Investing globally by investing locally 55

13. Impediments to global investing 57

14. Conclusion 58

15. Bibliography 59

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SCOPE

1. The Research shall be based on Secondary Data

2. The Research would analyse the current position of a Start-up in
comparison with a company
3. The Research would also point out the perception of people
towards start-up
4. The research would have a current scenario based case study
5. This research would mainly focus on Venture Capital

LIMITATIONS

1. Time Constraint
2. Proper bifurcation of data is a hindrance
3. As Start-ups require its founders to work hard hence work stress is
at its peak, so getting their time for interview and their unbiased
opinion is hard to find.
4. As other forms of funding aren’t highly acceptable hence only
Venture capital has been focused on

OBJECTIVES

1. To study the types of funding in a start-up

2. To study and analyse case studies of successful start-ups

3. To demonstrate statistical data on factors related to new companies

4. Understanding the financing challenges faced by start-ups in India

5. To analyse trends and patterns and also opinions on start-ups

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 1.INTRODUCTION

A Start-up is an early stage in the life cycle of an enterprise where the

entrepreneur moves from the idea stage to securing financing, laying
down the basic structure of the business and initiating operations or
trading.

An entity will be identified as a start-up:

1. Till up to five years from the date of incorporation.

2. If its turnover does not exceed 25 crores in the last five financial
years.
3. It is working towards innovation, development, deployment, and
commercialisation of new products, processes, or services driven
by technology or intellectual property.
A start-up is a young company that is just beginning to develop. Start-
ups are usually small and initially financed and operated by a handful of
founders or one individual. In the early stages, start-up companies&
expenses tend to exceed their revenues as they work on developing,
testing and marketing their idea.

For start-ups, the main task is to get its funding and hence this article
would contain the sources of funding that a start-up needs.

The start-up funding is basically classified into three sources.

1. Seed funding (Angel Investors)

2. Venture Capital

3. IPO

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Before these, you can even get some funding from your family or friends
against some minor stakes of your company.

Talking about Venture Capital commonly called as VC’s, Venture Capital

is a means of equity financing for rapidly-growing private companies.
Venture Capital firms invest funds on a professional basis, often focusing
on a limited sector of specialization (eg.IT, Infrastructure etc.)

To explain the funding through a timeline, a start-up gets money through

its own founder; it perhaps could be a very slight amount which would be
required at the initial stage, mostly for administrative work such as
renting a space, designing logo for company etc.Now while the company
is done with all the basic and petty works and has come up with a solid
structure of its product or service, it could look for seed funding. Seed
funding or seed capital, is a form of securities offering in which an
investor invests capital in exchange for an equity stake in the company.
Seed money options include friends and family funding, angel funding,
and crowd funding. After that comes a Venture Capitalist. A venture
capitalist is an investor who either provides capital to start-up ventures or
supports small companies that wish to expand but do not have access to
equities markets.

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 2.REVIEW OF LITERATURE

Sharifi.O in its Research Article mainly focused on the challenges that

are faced by startups in terms of financing. He quoted that “Funding is a
major concern for startups and small businesses. When the economy
tanked, it made it harder to convince investors and banks alike to part
with the cash that’s essential for growth in the early days of a business.
Credit today is tight, and its not clear precisely when it will become more
readily available. Plus, there’s a growing trend of smaller initial
investments in early stage startups”

Andaleeb U and Dr. Singh stated in its Research Article that venture
capital for startups are the riskiest investment, but if the start-up booms,
the returns are worth the risk. They said “Risks are an indispensable part
of startup success. However, an alert and insightful mind is necessary
while making decisions relating startup activities to reduce any risk of
failure. Although challenges are a part of every startup, the determination
to overcome these challenges even in times of distress and doom is what
makes a successful startup”.

An article in Economic times specified about the number of factors that

determine the cause of Indian startups looking for settling abroad. “When
companies decide to move, they should know whether the market is big
enough. “Unless that country ca n be a big market, it does founder of
Preksh, a Bengaluru-based startup that was selected for the Korean
Startup Challenge not make sense. Or the funding should be large
enough, “says Sathvik Muralidhar,

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 3. TYPES OF FUNDING

Many entrepreneurs looking to start a business get confused on the best

source of funding to seek for their start-up. With the many options there
are, choosing the ideal source of financing can be an overwhelming
process.

Here are some of the sources of funding that a start-up can acquire:-

#1: Bootstrap

Okay, I realize this isn’t actually “fundraising,” but sometimes the best
funding option is not to seek funding at all, but rather to cut corners
wherever you can and work on building your company from your
personal savings. Besides saving you money, bootstrapping also helps
you to focus on execution and build traction without outside interference.
It’s also a means for avoiding dilution and yielding larger profit margins.

#2: Equity Funding

Equity funding is an umbrella term that refers to any means of financing

your company in which you receive money in exchange for issuing shares
of your stock. There are multiple methods for raising equity capital, but,
depending on how you raise this money, you could be giving up
anywhere from 1-100% of your business. Equity rounds include:
• Seed.
Seed financing, as the name implies, is the relatively small amount of
money a business needs early on to get started. Usually businesses
seeking a seed round are still in the concept stage and need just a small
capital infusion to cover expenses until they can start earning revenue.
Seed money can also be a helpful tool for attracting future money from
bigger investors. Because seed capital is smaller and more of a high-risk

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 investment, it generally will come from friends and family or smaller
angel investors.

While borrowing from family and friends can be appealing since it’s less
formal than borrowing from a professional investor, it also holds personal
as well as professional risks. If you are going to go this route, make sure
you formalize the process and are a transparent as possible about the risks
of investment.

It can be easier to raise seed rounds from a smaller angel investor, as

opposed to going for the brass ring of VC investment. With an angel
investor, you will usually pay less of a premium in the amount of the
stock or percentage of your company you give up because angel investors
have other means of making money and may not be looking for as
specific a level of return as venture capitalists might be.

There are downsides to working with angel investors. Often you will need
to find multiple investors to give you the kind of capital you need (as
opposed to working with just one VC); this can lead to “herding cat
syndrome,” wherein you find yourself facing the challenge of managing
multiple people and relationships. But, for seed money, your angel
investors are still generally going to be a good first bet.
• Series A. Series A refers to the first round of stock offered to investors
during early-stage rounds. Typical Series A rounds fall in the range of $2-
5M, offer options for 20-40% of the company, and are intended to
support a company through the early stages of building a business, from
product development to hiring to marketing. Because the Series A round
is for more significant cash, investors are usually professional angel
investors or boutique VC firms who specialize in this first round of
financing.

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• Series B. Series B refers to second-stage financing. Series B usually
happens after the company has already achieved certain business
milestones and thus proven its potential viability as a company. This
series is also sometimes called a venture round since it is at this point that
venture capitalists usually get involved. Venture capitalists don’t just
offer a greater capital investment for a given round; there’s also a greater
possibility for going back to this same well for future rounds. Also,
experienced VCs can offer the kind of networking opportunities and
mentorship that unconnected smaller angel investors may not.
• Series C. As companies grow, they might continue to seek additional
funds to meet future milestones. Each successive venture round follows
alphabetically down the line (e.g. C, D, E...). VCs and private equity
investors support these financing rounds as well as future funding rounds
that more established companies may have to look forward to such as
bridge financing, expansion capital, late-stage capital, and leveraged
buyout.

#3: Debt Funding

Debt funding is also a viable funding option. With debt funding, you
borrow cash that you will have to pay back, regardless of whether or not
your company is making a profit. While you may choose to incur debt
(i.e. borrow cash) from friends and family, there are other kinds of debt
funding you could also pursue. The most common are:
• Venture debt. In some ways this kind of debt feels a lot like equity—at
least in the short term. The difference comes in the long term: at some
point, you will have to repay this debt, regardless of company
performance. For term loans, typically repayment terms are multi-year
(with three years being the most common). Non-formula lines of credit
usually have a shorter term of just one year.

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• AR line (accounts receivable-based credit lines). If your company has
accounts receivable (in other words, you are already generating revenue),
this can be a great funding option—cheaper and less risky than other
forms of venture debt. There are many lenders who are willing to finance
accounts receivable. If you are experiencing a working capital gap
between the time it takes to collect payments and make payments, you
can leverage your billed accounts receivable at a significantly discounted
rate. In other words, you’re essentially taking out a loan on payments yet
to be paid. Most of what we see with our clients in terms of debt funding
is venture debt and/or AR lines.
• Asset loan. This is essentially a loan that is collateralized by equipment.
If you need a significant amount of capital equipment, you can finance
these purchases. This kind of loan doesn’t always require that the
equipment you are purchasing is specifically tied to the funding you
receive. Sometimes you can even use this loan to fund growth in other
areas. This kind of debt is pretty hard to get so we don’t see it too often,
but it’s worth seeking out if you have equipment needs.
• SBA loan. These are bank loans guaranteed by the Small Business
Administration (SBA), usually with a lower interest rate than that of loans
not guaranteed by the SBA. This guarantee doesn’t mean that you are off
the hook if your business fails; in the case that your business goes south,
you still need to pay back the loan. The main advantage to this type of
loan is access: with the backing of the SBA, you might be approved for
loans that you wouldn’t have received otherwise. Though none of our
clients have received SBA loans, it’s still worth looking into if you’re a
new start- up in need of funds.

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 4. Venture capital

The term venture capital comprises of two words that is Venture and
capital Venture is a course of processing the outcome of which is
uncertain but to which is attended the risk or danger of loss. Capital
means resources to start an enterprise. To connote the risk and adventure
of such a fund , the generic name Venture Capital was coined.

Venture capital is considered as financing of high and new technology

based enterprise. It is said that venture capital involves investment in new
or relatively untried technology, initiated by relatively new and
professionally or technical qualified entrepreneurs with inadequate funds.
The conventional financiers, unlike venture capitals mainly finance
proven technologies and established markets. However high technology
may not be a pre requisite for a VC.

Venture capital has also been described as “unsecured risk financing”.

The relatively high risk of venture capital is compensated by the
possibility of high returns usually through substantial capital gains in
term.

FEATURES OF VENTURE CAPITAL

▪ High Risk

By definition the Venture capital financing is highly risky and chances of

failure are high as it provides long term start up capital to high risk- high
reward ventures. Ventures capital assumes four type of risks, these are:

o Management risk -Inability of management teams to work

together.
o Market risk -Product may fail in the market.

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 o Product risk -Product may not be commercially viable.
o Operation risk -Operation may not be cost effective
resulting in increased cost decreased gross margin.

▪ High Tech

As opportunities in the low technology area tend to be few of lower order,

and hi-tech projects generally offer higher returns than projects in more
traditional area, venture capital investments are made in high tech. areas
using new technologies or producing innovative goods by using new
technology. Not just high technology, any high risk ventures where the
entrepreneur has conviction but little capital gets venture finance. Venture
capital is available for expansion of existing business or diversification to
a high risk area. Thus technology financing had never been the primary
objective but incidental to venture capital.

▪ Equity Participation & Capital Gains

Investments are generally in equity and quasi equity participation through

direct purchase of share, options, convertible debentures where the debt
holder has the option to convert the loan instruments into stock of the
borrower or a debt with warrants to equity investment. The funds in the
form of equity help to raise term loans that are cheaper source of funds. In
the early stage of business, because dividends can be delayed, equity
investment implies that investors bear the risk of venture and would earn a
return commensurate with success in the form of capital gains.

▪ Participation In management

Venture capital provides value addition by managerial support, monitoring

and follow up assistance. It monitors physical and financial progress as

9
well as market development initiative. It helps by identifying key resource
person. They want one seat on the company’s board of directors and
involvement, for better or worse, in the major decision affecting the
direction of company. This is a unique philosophy of “hand on
management” where Venture capitalist acts as complementary to the
entrepreneurs. Based upon the experience other companies, a venture
capitalist advice the promoters on project planning, monitoring, financial
management, including working capital and public issue. Venture capital
investor cannot interfere in day today management of the enterprise but
keeps a close contact with the promoters or entrepreneurs to protect his
investment.

▪ Length of Investment

Venture capitalist help companies grow, but they eventually seek to exit
the investment in three to seven years. An early stage investment may take
seven to ten years to mature, while most of the later stage investment takes
only a few years. The process of having significant returns takes several
years and calls on the capacity and talent of venture capitalist and
entrepreneurs to reach fruition.

▪ Illiquid Investment

Venture capital investments are illiquid, that is not subject to repayment

on demand or following a repayment schedule. Investors seek return
ultimately by means of capital gain when the investment is sold at market
place. The investment is realized only on enlistment of security or it is
lost if enterprise is liquidated for unsuccessful working. It may take
several years before the first investment starts too locked for seven to ten

10
years. Venture capitalist understands this illiquidity and factors this in his
investment decision

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 5. Venture Capital Spectrums

The growth of an enterprise follows a life cycle as shown in the diagram

below. The requirements of funds vary with the life cycle stage of the
enterprise. Even before a business plan is prepared the entrepreneur invests
his time and resources in surveying the market, finding and understanding
the target customers and their needs. At the seed stage the entrepreneur
continue to fund the venture with his fund or family funds. At this stage
the fund are needed to solicit the consultant’s services in formulation of
business plans, meeting potential customers and technology partners. Next
the funds would be required for development of the product/process and
producing prototypes, hiring key people and building up the managerial
team. This is followed by funds for assembling the manufacturing and
marketing facilities in that order. Finally the funds are needed to expand
the business and attaint the critical mass for profit generation. Venture
capitalists cater to the needs of the entrepreneurs at different stages of their
enterprises. Depending upon the stage they finance, venture capitalists are
called angel investors, venture capitalist or private equity supplier/investor.

Venture capital was started as early stage financing of relatively small but
rapidly growing companies. However various reasons forced venture
capitalists to be more and more involved in expansion financing to support
the development of existing portfolio companies. With increasing demand
of capital from newer business, venture capitalists began to operate across
a broader spectrum of investment interest. This diversity of opportunities
enabled venture capitalists to balance their activities in term of time
involvement, risk acceptance and reward potential, while providing
ongoing assistance to developing business.

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 Introduction stage

Growth

Stage
Later Stage

Seed Capital Early Stage

Second Stage

Startup Capital

Venture Capital Spectrum/Stage

Different Venture capital firms have different attributes and aptitudes for
different types of Venture capital investments. Hence there are different
stages of entry for different venture capitalists and they can identify and
differentiate between types of venture capital investments, each
appropriate for the given stage of the investee company, these are:-

1. Early stage Finance

▪ Seed capital
▪ Start up Capital
▪ Early/First Stage Capital
▪ Later/Third Stage capital

2. Later Stage Finance

▪ Expansion/Development Stage Capital

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 ▪ Replacement Finance
▪ Management Buy Out and Buy Ins
▪ Turnarounds
▪ Mezzanine/Bridge Finance

Not all business firms pass through each of these stages in sequential
manner. For instance seed capital is normally not required by service based
ventures. It applies largely to manufacturing or research based activities.
Similarly second round finance does not always follow early stage finance.
If the business grows successfully it is likely to develop sufficient cash to
fund its own growth, so does not require venture capital for growth.

The table below shows risk perception and time orientation for different
stages of venture capital financing.

Financing Stage Period (funds Risk Activity to be financed

locked in perception
years)
Early stage finance 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
Second stage 3-5 Sufficiently Expand market & growing
high working capital need
Later stage finance 1-3 Medium Market expansion,
acquisition & product

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 development for profit
making company
Buy out-in 1-3 Medium Acquisition financing
Turnaround 1-3 Medium to Turning around a sick
high company
Mezzanine 1-3 Low Facilitating public issue
Venture Capital- Financing Stages

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 6. Venture Capital Investment Process

Venture capital investment process is different from normal project

financing. In order to understand the investment process a review of the
available literature on venture capital finance is carried out. Tyebjee and
Bruno in 1984 gave model of venture capital investment activity with some
variations is commonly used presently. As per this model this activity is a
five step process as follows:

1. Deal Organization
2. Screening
3. Evaluation or due Diligence
4. Deal Structuring
5. Post Investment Activity and Exit

Investors

Screening

VC MGT Fund
Selection

Investment
process

Structuring
Prospective
Investee

Monitoring
Exit
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 ▪ Deal Origination:

In generating a deal flow, the VC investor creates a pipeline of deals or

investment opportunities that he would consider for investing in. deal may
originate in various ways. Referral system, active search system, and
intermediaries. Referral system is an important source of deals. Deals may
be referred to VCFs by their parent organizations, trade partners, industry
associations, friends etc. Another deal flow is active search through
networks, trade fairs, conferences, seminars, foreign visits etc.
intermediaries is used by venture capitalists in developed countries like
USA, is certain intermediaries who match VCFs and the potential
entrepreneurs.

▪ Screening:

VCFs, before going for an in-depth analysis, carry out initial screening of
all projects on the basic of some broad criteria. For example, the screening
process may limit projects to areas in which the venture capitalist is
familiar in terms of technology, or product, or market scope. The size of
investment, geographical location and stage of financing could also be used
as the broad screening criteria.

▪ Due Diligence:

Due diligence is the industry jargon for all the activities that are associated
with evaluating an investment proposal. The Venture capitalists evaluate
the quality of entrepreneur before appraising the characteristics of the
product, market or technology. Most venture capitalists ask for a business
plan to make an assessment of the possible risk and return on the venture.
Business plan contains detailed information about the proposed venture.
The evaluation of ventures by VCFs in Indian includes; Preliminary

17
evaluation: the applicant required to provide a brief profile of the proposed
venture to establish prima facie eligibility.

Detailed evaluation: once the preliminary evaluation is over, the proposal

is evaluated in greater detail. VCFs in India expect the entrepreneur to
have: - integrity, long-term vision, urge to grow, managerial skills,
commercial orientation.

VCFs in India also make the risk analysis of the proposed projects which
includes: product risk, market risk, technological risk and entrepreneurial
risk. The final decision is taken in terms of the expected risk-return trade-
off as shown in figure.

▪ Deal Structuring:

In this process, the venture capitalist and the venture company negotiate
the terms of the deals, that are the amount form and price of the investment.
This process is termed as deal structuring. The agreement also include the
venture capitalists right to control the venture company and to change its
management if needed, buyback arrangement specify the entrepreneurs
equity share and the objectives share and the objectives to be achieved.

▪ Post Investment Activities:

Once the deal has been structured and agreement finalized, the venture
capitalist generally assumes the role of a partner and collaborator. He also
gets involved in shaping of the direction of the venture. The degree of the
venture capitalists involvement depends on his policy. It may not, however
be desirable for a venture capitalist to get involved in the day-to-day
operation of the venture. If a financial or managerial crisis occurs, the
venture capitalist may intervene, and even install a new management team.

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 ▪ Exit:

Venture capitalists generally want to cash-out their gains in five to ten

years after the initial investment. They play a positive role in directing the
company towards particular exit routes. A venture may exist in one of the
following ways:

There are four ways for a venture capitalist to exit its investment:

▪ Initial Public Offer (IPO)

▪ Acquisition by another company
▪ Re-purchase of venture capitalists share by the investee
company
▪ Purchase of venture capitalists share by a third party

Promoters Buy-back

The most popular disinvestment route in India is promoters buy-back. This

route is suited to Indian conditions because it keeps the ownership and
control of the promoter intact. The obvious limitation, however, is that in
a majority of cases the market value of the shares of the venture firm would
have appreciated so much after some years that the promoter would to be
in a financial position to buy them back.

In India, the promoters are invariably given the first option to buy back
equity of their enterprise. For example, RCTO participates in the assisted
firm’s equity with suitable agreement for the promoter to repurchase it.
Similarly, Confina-VCF offers an opportunity to the promoters to buy back
the shares of the assisted firm within an agreed period at a predetermined
price. If the promoter fails to buy back the shares within the stipulated
period, Confine-VCF would have the discretion to divest them in any

19
manner it deemed appropriate. SBI capital Markets ensures through
examining the personal assets of the promoters and their associates, which
buy back, would be a feasible option. GV would make disinvestment, in
consultation with the promoter, usually after the project has settled down,
to a profitable level and the entrepreneur is in a position to avail of finance
under conventional schemes of assistance from banks or other financial
institutions.

Initial Public Offers (IPOs)

The benefits of disinvestments via the public issue route are improved
marketability and liquidity, better prospects for capital gains and widely
known status of the venture as well as market control through public share
participation. This option has certain limitations in the Indian context. The
promotion of the public issue would be difficult and expensive since the
first generation entrepreneurs are not known in the capital markets. Further,
difficulties will be caused if the entrepreneurs business is perceived to be
an unattractive investment proposition by investors. Also, the emphasis by
the Indian investors on short-term profits and dividends may tend to make
the market price unattractive. Yet another difficulty in India until recently
was that the Controller of Capital Issues (CCI) guidelines for determining
the premium on shares took into account the book value and the cumulative
average EPS till the date of the new issue. This formula failed to give due
weight age to the expected stream of earning of the venture firm. Thus, the
formula would underestimate the premium. The government has now
abolished the Capital Issues Control Act, 1947 and consequently, the office
of the controller of Capital Issues. The existing companies are now free to
fix the premium on their shares. The initial public issue for disinvestments
of VCFs holding can involve high transaction costs because of the
inefficiency of the secondary market in a country like India. Also, this

20
option has become far less feasible for small ventures on account of the
higher listing requirement of the stock exchanges. In February 1989, the
Government of India raised the minimum capital for listing on the stock
exchanges from Rs 10 million to Rs 30 million and the minimum public
offer from Rs 6 million to Rs 18 million.

Sale on the OTC Market

An active secondary capital market provides the necessary impetus to the

success of the venture capital. VCFs should be able to sell their holdings,
and investors should be able to trade shares conveniently and freely. In the
USA, there exist well-developed OTC markets where dealers trade in share
on telephone/terminal and not on an exchange floor. This mechanism
enables new, small companies which are not otherwise eligible to be listed
on the stock exchange, to enlist on the OTC markets and provides liquidity
to investors. The National Association of Securities dealers Automated
Quotation System (NASDAQ) in the USA daily quotes over 8000 stock
prices of companies backed by venture capital.

The OTC Exchange in India was established in June 1992. The

Government of India had approved the creation for the Exchange under the
Securities Contracts (Regulations) Act in 1989. It has been promoted
jointly by UTI, ICICI, SBI Capital Markets, Can Bank Financial Services,
GIC, LIC and IDBI. Since this list of market-makers (who will decide daily
prices and appoint dealers for trading) includes most of the public sector
venture financiers, it should pick up fast, and it should be possible for
investors to trade in the securities of new small and medium size enterprise.

21
The other disinvestment mechanisms such as the management buy outs or
sale to other venture funds are not considered to be appropriate by VCFs
in India.

The growth of an enterprise follows a life cycle as shown in the diagram

below. The requirements of funds vary with the life cycle stage of the
enterprise. Even before a business plan is prepared the entrepreneur invests
his time and resources in surveying the market, finding and understanding
the target customers and their needs. At the seed stage the entrepreneur
continue to fund the venture with his own fund or family funds. At this
stage the funds are needed to solicit the consultant’s services in formulation
of business plans, meeting potential customers and technology partners.
Next the funds would be required for development of the product/process
and producing prototypes, hiring key people and building up the
managerial team. This is followed by funds for assembling the
manufacturing and marketing facilities in that order. Finally the funds are
needed to expand the business and attaint the critical mass for profit
generation. Venture capitalists cater to the needs of the entrepreneurs at
different stages of their enterprises. Depending upon the stage they finance,
venture capitalists are called angel investors, Venture capitalist or private
equity supplier/investor.

22
 7. PLAYERS IN VENTURE CAPITAL INDUSTRY

Idea Established the Expansion Troubleshooting

company

Break Investing In IPO Turnaround

Business
Even- technology
concept
point Medium
Angel Small Corporate venture
Venture investors funds

Fund

Big Venture Funds + Financial Funds

Players in Venture Capital Industry

There are following group of players:

▪ Angels and angel clubs

▪ Venture capital funds
o Small
o Medium
o Large
▪ Corporate Venture funds
▪ Financial service venture groups

23
 ▪ Angels and angel clubs

Angels are wealthy individuals who invest directly into companies. They
can form angel clubs to coordinate and bundle their activities. Beside the
money, angels often provide their personal knowledge, experience and
contacts to support their investees. With average deals sizes from USD100,
000 to USD 500,000 they finance companies in their early stages.
Examples for angel clubs are –Media Club, Dinner Club, and Angel’s
forum

▪ Small and Upstart Capital Funds

These are smaller Venture Capital Companies that mostly provide seed and
startup capital. The so called “Boutique firms” are often specialized in
certain industries or market segments. Their capitalization is about USD
20 to USD 50 million (is this deals size or total money under management
or money under management per fund?). As for small and medium Venture
capital funds strong competition will clear the market place. There will be
mergers and acquisitions leading to a concentration of capital. Funds
specialized in different business areas will form strategic partnerships.
Only the more successful funds will be able to attract new money.
Examples are:

o Artemis Comaford
o Abbell Venture Fund
o Acacia Venture Partners

▪ Medium Venture Funds

The medium venture funds finance all stages after seed and operate in all
business segments. They provide money for deals up to USD 250 million.

24
Single funds have up to USD 5 billion under management. An example is
Accel Partners

▪ Large Venture Funds

As the medium funds, large funds operate in all business sectors and
provide all types of capital for companies after seed stage. They often
operate internationally and finance deals up to USD 500 million the large
funds will try to improve their position by mergers and acquisitions with
other funds to improve size, reputation and their financial muscle. In
addition they will to diversify. Possible areas to enter are other financial
services by means of M&As with financial services corporations and the
consulting business. For the latter one the funds have a rich resource of
expertise and contacts in house. In a declining market for their core activity
and with lots of tumbling companies out there is no reason why Venture
Capital funds should offer advice and consulting only to their investees.

Examples are:

o AIG American International Group

o Cap Vest man
o 3i

▪ Corporate Venture Funds

These Venture Capital funds are set up and owned by technology

companies. Their aim is to widen the parent company’s technology base in
an win-win-situation for both, the investor and the investee. In general,
corporate funds invest in growing or maturing companies, often when the
investee wishes to make additional investments in technology or product
development. The average deals size is between USD 2 million and USD

25
5 million. The large funds will try to improve their position by mergers and
acquisitions with other funds to improve size, reputation and their financial
muscle. In addition they will to diversify. Possible areas to enter are other
financial services by means of M&As with financial services corporations
and the consulting business. For the latter one the funds have a rich
resource of expertise and contents in house. In a declining market for their
core activity and with lots of tumbling companies out there is no reason
why Venture Capital funds should offer advice and consulting only to their
investees. Examples are:

o Oracle
o Adobe
o Dell
o Kyocera

As an example, Adobe systems launched a $40m venture fund in 1994 to

invest in companies strategic to its core business, such as Cascade Systems
Inc and lantana research Corporation-has been successfully boosting
demand for its core products, so that Adobe recently launched a second
$40m fund.

▪ Financial Funds:

A solution for financial funds could be a shift to a higher securisation of

Venture Capital activities. That means that the parent companies shift the
risk to their customers by creating new products such as stakes in a Venture
Capital fund. However, the success of such products will depend on the
overall climate and expectations in the economy. As long as the sown turn
continues without any sign of recovery customers might prefer less risky
alternatives.

26
 VENTURE CAPITAL IN INDIA

8. EVOLUTION OF VENTURE CAPITAL

INDUSTRY IN INDIA

The first major analysis on risk capital for India was reported in 1983. It
indicated that new companies often confront serious barriers to entry into
capital market for raising equity finance which undermines their future
prospects of expansion and diversification. It also indicated that on the
whole there is a need to review the equity cult among the masses by
ensuring competitive return on equity investment. This brought out the
institutional inadequacies with respect to the evolution of venture capital.

In India, the Industrial Finance Corporation of India (IFCO) initiated the

idea of Venture Capital when it established the Risk Capital Foundation in
1975 to provide seed capital to small and risky projects. However the
concept of venture capital financing got statutory recognition for the first
time in the fiscal budget for the year 1986-87.

The venture Capital companies operating at present can be divided into

four groups:

▪ Promoted by All-India Development Financial Institutions

▪ Promoted by State Level Financial Institutions
▪ Promoted by Commercial Banks
▪ Private Venture Capitalists.

27
 9. VENTURE CAPITAL INDUSTRY LIFE CYCLE
IN INDIA

From the industry life cycle we can know in which stage venture capital
are standing. On the basis of this management can make future strategies
of their business.

Industry Life Cycle

16000
14000
12000
Introduction Growth
10000
8000
6000
4000
2000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
1 2 3 4 5 6 7 8 9 10

The growth of venture capital in India has four separate phases:

▪ Phase I- formation of TDICI in 80’s and regional funds as GVFL &

APIDC in early 90s.

The first origin of modern venture capital in India can be traced to the
setting up of a technology Development Funds in the year 1987-88, though
the levy of access on all technology import payment. Technology
development fund was stated to provide financial support to innovative and
high risk technological programmers through the Industrial development
bank of India.

The first phase was the initial phase in which the concept of venture capital
got wider acceptance. The first period did not really experience any

28
substantial growth of venture capitals. The 1980’s were marked by an
increasing disillusionment with the trajectory of the economic system and
a belief that liberalization was needed. The liberalization process started in
1985 in a limited way. The concept of venture capital received official
recognition in 1988 with the announcement of the venture capital
guidelines.

During 1988 to 1992 about 9 venture capital institutions came up in India.

Though the venture capital funds should operate as open entities,
Government of India controlled them rigidly. One of the major forces that
induced Government of India to start venture funding was the World Bank.
The initial funding has been provided by World Bank. The most important
feature of the 1988 rules was that venture capital funds received the benefit
of a relatively low capital gains tax rate which was lower than the corporate
rate. The 1988 guidelines stipulated venture capital funding firms should
meet the following criteria:

o Technology involved should be new, relatively untried, very

closely held, in the process of being taken from pilot to commercial
stage or incorporate some significant improvement over the
existing ones in India.
o Promoters/entrepreneurs using the technology should be relatively
new, professionally or technically qualified, with inadequate
resources to finance the project.

Between 1988 and 1994 about 11venture capital funds became operational
either through reorganizing the business or through new entities.

All these followed the Government of India guidelines for venture capital
activities and have primarily supported technology oriented innovative

29
business started by first generation entrepreneurs. Most of these were
operated more like a financing operation. The main feature of this phase
was that the concept got accepted. Venture capitals become operational in
India before the liberalization process started. The context was not fully
ripe for growth of venture capitals. Till 1995 the venture capital operated
like any bank but provided funds without collateral. The first stage of the
venture capital industry in India was plagued by in experienced
management, mandates to invest in certain states and sectors and general
regulatory problems. Many public issue by small and medium companies
have shown that the Indian investor is becoming increasingly wary of
investing in the projects of new and unknown promoters.

The liberation of the economy and toning up of the capital market changed
the economic landscape. The decisions relating to issue of stocks and
shares was handled by an office namely: Controller of capital issues (CCI).
According to 1988 venture capital guideline, any organization requiring
starting venture funds have to forward an application to CCI. Subsequent
to the liberalization of the economy in 1991, the office of CCI was
abolished in May 1992 and the powers were vested in Securities and
Exchange Board of India (SEBI). The Securities and Exchange Board of
India Act, 1992 empower SEBI under section 11(2) thereof to register and
regulate the working of venture capital funds. This was done in 1996,
through a government notification. The power to control venture funds has
been given to SEBI only in 1995 and the notification came out in 1996. Till
this time venture funds were dominated by Indian firms. The new
regulations became the harbinger of the second phase of the venture capital
growth.

▪ Phase II- Entry of Foreign Venture Capital Funds (VCF) between

1995-1999

30
The second phase of venture capital growth attracted many foreign
institutional investors. During this period overseas and private domestic
venture capitalists began investing in VCF. The new regulations in 1996
helped in this. Though the changes proposed in 1996 had a salutary effect,
the development of venture capital continued to be inhibited because of the
regulatory regime and restricted the FDI environment. To facilitate the
growth of venture funds, SEBI appointed a committee to recommend the
changes needed in the venture capital funding context. This coincided with
the IT boom as well as the success of Silicon Valley startups. In other
words, venture capital growth and IT growth co-evolved in India.

▪ Phase III-(2000 onwards)- Venture capital becomes risk averse and

activity declines:

Not surprisingly, the investing in India came “crashing down” when

NASDAQ lost 60% of its value during the second quarter of 2000 and
public markets (including those in India) also declined substantially.
Consequently, during 2001-2003, the venture capitals started investing less
money and in money and in more mature companies in an effort to
minimize the risks. This decline broadly continued until 2003.

▪ Phase IV- (2004 onward)- Global venture capitals firms actively

investing in India

Since India’s economy has been growing at 7%-8% a year, and since some
sectors, including the services sector and the high end manufacturing
sector, have been growing at 12%-14% a year investors renewed their
interest and started investing again in 2004 the number of deals and the
total dollars invested in India has been increasing substantially.

31
 10. KEY SUCCESS FACTOR FOR VENTURE
CAPITAL INDUSTRY IN INDIA

Knowledge becomes the key factor for a competitive advantage for

company. Venture Capital firms need more expert knowledge in various
fields. The various key success factors for venture capital industry are as
follow:

▪ Knowledge about Govt. changing policies:

Investment, management and exit should provide flexibility to suit the

business requirements and should also be driven by global trends. Venture
capital investments have typically come from high net worth individuals
who have risk taking capacity. Since high risk is involved in venture
financing, venture investors globally seek investment and exit on very
flexible terms which provides them with certain levels of protection. Such
exit should be possible through IPOs and mergers/acquisitions on a global
basis and not just within India. In this context the judgment of the judiciary
raising doubts on treatment of tax on capital gains made by firms registered
in Mauritius gains significance - changing policies with a retrospective
effect is undoubtedly acting as a dampener to fresh fund raising by Venture
capital firms.

▪ Quick Response time :

The companies have flat organization structure results in quicker decision

making. The entrepreneur is relieved of the trauma that one normally goes
through in an interface with a funding institution or a development agency.
They follow a clearly defined decision making process that works with
clock like precision, which means that if they agree on a funding schedule
entrepreneur can count on them to stick it.

32
 ▪ Knowledge about Global Environment

With increasing global integration and mobility of capital it is important

that Indian venture capital firms as well as venture financed enterprises be
able to have opportunities for investment abroad. This would not only
enhance their ability to generate better returns but also add to their
experience and expertise to function successfully in a global environment.

▪ Good Human Resource :

Venture capital should become an institutionalized industry financed and

managed by successful entrepreneurs, professional and sophisticated
investors. Globally, venture capitalist are not merely finance providers but
are also closely involved with the investee enterprises and provide
expertise by way of management and marketing support. This industry has
developed its own ethos and culture. Venture capital has only one common
aspect that cuts across geography i.e. it is risk capital invested by experts
in the field. It is important that venture capital in India be allowed to
develop via professional and institutional management.

▪ Balance between three factors

Venture Capital backed companies can provide high returns. However,

despite of success stories like Apple, FedEx of Microsoft, a lot of these
deals fail. It is said that only one out of ten companies succeed. That's why
every deal has an element of potential profit and an element of risk,
depending on the deals size. To be successful, a Venture Capital Company
must manage the balance between these three factors.

33
 Financial markets and
the industries to invest in

Knowledge

Risk management skills Possible investees and

and contacts to investors external expertise

Frame work for key success factor

Knowledge is key, to get the balance in this "Magic Triangle". With

knowledge we mean knowledge about the financial markets and the
industries to invest in, risk management skills and contacts to investors,
possible investees and external expertise. High profits, achievable by larger
deals, are not only important for the financial performance of the Venture
Capital Company. As a good track record they are also a vital argument to
attract funds which are the basis for larger deals. However, larger deals
imply higher risks of losses. Many Venture Capital companies try to share
and limit their risks. Solutions could be alliances and careful portfolio
management. There are Venture Capital firms that refuse to invest in e-
start-up because they perceive it as too risky to follow today's type.

34
 11. OPPORTUNITIES AND THREATS

▪ OPPORTUNITIES:

Initiatives taken by the Government in formulating policies to

encourage investors and entrepreneurs

The emerging scenario of global competitiveness has put an immense

pressure on the industrial sector to improve the quality level with
minimization of cost of products by making use of latest technological
skills. The implication is to obtain adequate financing along with the
necessary hi-tech equipment to produce an innovative product which can
succeed and grow in the present market condition. Unfortunately, our
country lacks on both fronts. The necessary capital can be obtained from
the venture capital firms who expect an above average rate of return on the
investment. Government of India understands this.

Also, The Government of India in an attempt to bring the nation at par and
above the developed nations has been promoting venture capital financing
to new, innovative concepts & ideas, liberalizing taxation norms providing
tax incentives to venture firms, giving an opportunity for the creation of
local pools of capital and holding training sessions for the emerging VC
investors.

In the year 2000, the finance ministry announced the liberalization of tax
treatment for venture capital funds to promote them & to increase job
creation. This is expected to give a strong boost to the non-resident Indians
located in the Silicon Valley and elsewhere to invest some of their capital,
knowledge and enterprise in these ventures.

35
 o SME GROWTH

No. deals V/S No. of SMEs

450 128.44 130

400 387
123.42 125
350
299
300 120
118.59
250
115
200 113.95
146
150 109.49 110
100 71
56 105
50
0 100
2003 2004 2005 2006 2007

No. of deals No. of SMEs

VC, to be able to contribute to developing entrepreneurship in India, needs

to concentrate its investment in small and medium enterprises. A “Package
for Promotion of Micro and Small Enterprises” was announced in
February 2007. This includes measures addressing concerns of credit,
fiscal support, cluster-based development, infrastructure, technology, and
marketing. Capacity building of MSME Associations and support to
women entrepreneurs are the other important features of this package.
SMEs have been allowed to manage their direct/indirect exposure to
foreign exchange risk by booking/canceling/rollover of forward contracts
without prior permission of RBI.

To boost the micro and small enterprise sector, the bank has decided to
refinance an amount of 7000 crore to the Small Industries Development
Bank of India, which will be available up to March 31, 2010. The Central
Bank said that it is also working on a similar refinance facility for the
National Housing Bank (NHB) of an amount of Rs 4, 000 crore.

36
The Indian economy is growing at 8-9% so the there is a development of
all sector like manufacturing, services sector. So there is a great
opportunities for Venture Capital firms. Because mostly invest their money
in this sectors.

India amongst leading entrepreneurial Hotbeds globally

City competencies emerging

o Bangalore
✓ All IP-led companies; IT and IT-enabled services
o Delhi (NCR)
✓ Software services, IT enabled services, Telecom
o Mumbai
✓ Software services, IT enabled services, Media, Computer Graphics,
Animation, Banking
o Other emerging Centres

Chennai, Hyderabad, and Pune

▪ Threats:

Venture Capital Market in India Getting Overheated

The Venture Capital market in India seems to be getting as hot as the

country’s famous summers. However, this potential over-exuberance may
lead to some stormy days ahead, based on sobering research compiled by
global research and analytics services firm, Evalueserve. Evalueserve
research shows an interesting phenomenon is beginning to emerge:

Over 44 US-based Venture capital firms are now seeking to invest heavily
in start-ups and early-stage companies in India. These firms have raised, or

37
are in the process of raising, an average of US $100 million each. Indeed,
if these 40-plus firms are successful in raising money, they would garner
approximately $4.4 billion to be invested during the next 4 to 5 years.
Taking Indian Purchasing Power Parity (PPP) into consideration, this
would be equivalent to $22 billion worth of investment in the US. Since
about $1.75 billion (or approximately 40% of $4.4 billion) has been already
raised, even if only $2.2 billion is raised by December 2006, Evalueserve
cautions that there will be a glut of Venture Capital money for early stage
investments in India. This will be especially true if the VCs continue to
invest only in currently favorite sectors such as IT, BPO, software and
hardware products, telecom, and consumer Internet. Given that a typical
start-up in India would require $9 million during the first three years (i.e.,
$3 million per year) and even assuming that the start-up survives for three
years, investing $2.2 billion during 2007-2010 would imply investing in
150 to 180 start-ups every year during this period, which simply does not
seem practical if the VCs continue to focus only on their current favorite
sectors.

Unproductive workforce:

A global survey by McKinsey & Company revealed that Indian business

leaders are much more optimistic about the future than their international
peers. So Indian employees are tardy in their job so it will effect reversely
on the economic condition of the country. Because they are unproductive
to the economy of the country.

38
Exit route barriers:

Due to crash down of market by 51% from January to November 2008. It

creates a problem for venture capital firms. Because nobody is trying to
come up with IPO and IPO is the exits route door Venture Capital.

Taxes on emerging sector:

As per Union Budget 2007 and its broad guidelines, Government proposed
to limit pass-through status to venture capital funds (VCFs) making
investment in nine areas. These nine areas are biotechnology, information
technology, nanotechnology, seed research and development, R&D for
pharmacy sectors, dairy industry, poultry industry and production of bio-
fuels. Pass-through status means that the incomes earned by funds are
taxable now.

39
 13.PAYTM- CASE STUDY

Paytm is an Indian Electronic payment and e-commerce brand based out

of Delhi NCR, India. Launched in August 2010, it is the consumer brand
of parent One97 Communications. The name is an acronym for "Pay
Through Mobile." The company employs over 13,500 employees as of
September 2017 and has 3 million offline merchants across India. It also
operates the Paytm payment gateway and the Paytm Wallet.
Among other sources of funding, in 2015, Paytm became the first Indian
company to receive funding from Chinese e-Commerce company Alibaba
after it raised over $625 million at a valuation of $1.5 billion. The
Alibaba Group was the biggest stakeholder in Paytm parent company
One97 Communications. Paytm was founded and incubated by One97
Communications Limited in 2010 as a prepaid mobile recharge website.
In an interview, its founder Vijay Shekhar Sharma related how he was
inspired during a visit to China, when he saw vegetable vendors using
their mobile phones to receive payments from some customers. This led
to him establishing Paytm wallet in 2013.

Funding

In March 2015, Indian industrialist Ratan Tata made a personal

investment in the firm. The same month, the company received a $575
million investment from Alibaba Group, after Ant Financial service
group, an Alibaba Group affiliate, took a 25% stake in One97 as part of a
strategic agreement. Paytm borrowed 300cr from ICICI Bank in March
2016 as working capital. As May 18, 2017 SoftBank invested $1.4 billion

40
in the company, and as one of the Largest Funding in India's Ecosystem
which valued paytm from $4.8 B to $8 B. It was Softbank's single largest
investment in India to date. Paytm had previously raised $500 million
from Alibaba and Ant Financial.

In August 2016, Paytm received an investment from Mountain Capital,

one of Taiwan-based MediaTek’s investment funds, which valued Paytm
at of over USD$5 billion Paytm launched bill payments services in
Canada, its first overseas market in March 2017.

In May 2017 Paytm Launched Paytm Payments Bank For Paytm E-

Wallet Users. Also in May 2017, PayTM was reported to be in talks to
pump in $30 million in Insider.in for a majority stake.[24] In July 2017,
Paytm acquired a majority stake in Insider.in, allowing its users to book
events instantly.

By June 2017, Paytm Mall, the recently launched online marketplace of

the Noida-based organization, has confirmed that it is digitizing the
catalogues of more than 1,000 cars and two-wheeler dealerships to
increase online usage and offline sales. In June 2017 the Economic
Times reported that PayTM was seeking a license to set up a money
market fund to enable its users to store cash and earn interest on it. They
were awaiting an approval having already applied to India's central RBI
to start the fund.

Payments bank
In 2015 Paytm received a license from Reserve Bank of India to start one
of India's first Payments Bank called "Paytm Payments Bank
Limited".[4] At the time, the bank intended to use Paytm’s existing user
base for offering new services, including debit cards, savings accounts,
online banking and transfers, to enable a cashless economy. The
payments bank would be a separate entity in which the founder Vijay

41
Shekhar Sharma will hold 51%, One97 Communications will hold 39%
and 10% will be held by a subsidiary of One97 and Sharma.

Paytm Payments Bank launched operations on May 23, 2017, initially

with invite only system. From August 31, 2017, the services of the bank
were open to everyone through Paytm App

PAYTM FUNDING TIMELINE

YEAR ACTIVITY

AUGUST 2010 Paytm was founded by Vijay Shekhar Sharma with

equal stakes between him and his parent co. One97

2013 Launched Paytm wallet as he saw a vegetable vendor

accepting payment in china through a mobile app.

MARCH 2015 Alibaba and Ant Financial made an investment of

$1.5 billion.

MARCH 2015 Ratan Tata made a personal Investment

JUN 2015 Invested $5 million in ‘JUGNOO’ through serious A

funding.

JULY 2015 Invested $50 million in ‘LITTLE’ app as a Lead

Venture capital.

AUGUST 2015 Invested Undisclosed amount of money in a you tube

channel ‘gadget 360’

42
SEPTEMBER Invested $10 Million in ‘loginext’ through Series A
2015 funding

DECEMBER Acquired ‘NEAR.IN’ for $2m

2015

JANUARY Acquired Shifu for $8m

2016

APRIL 2016 Invested $10m in ‘JUGNOO’ as a lead Series B

funding.

SEPTEMBER Acquired ‘Edukart’ for an unknown amount

2016

NOVEMBER Acquired Shopsity for an unknown amount

2016

NOVEMBER Invested an Undisclosed amount in ‘TapCheif’

2016 through Seed Funding (Lead)

NOVEMBER Paytm becomes the leading payment bank over the

2016 world because of the demonetization of currency in
India earning up to 120cr rupees per day.

FEBRUARY Vijay Shekhar Sharma and One97 again invests an

2017 amount of rupees 2.18bn with equal stakes

MAY 17 Softbank invested $1.4bn in Paytm which is one of

the Indias largest venture capital investments.

JUNE 17 Paytm acquires ‘Insider.in’ for $350m in cash

43
 CURRENT SCENARIO OF PAYTM

Paytm, is in advanced talks to raise fresh funding of about Rs 2,000 crore

($300 million) from Taiwanese semiconductor maker MediaTek,
Goldman Sachs, Singapore's Temasek and other investors, according to
two persons with knowledge of the development. This round will see
Paytm's valuation more than doubling to $5 billion.
Existing investors, which include Chinese Internet giant Alibaba and its
payments affiliate Alipay besides venture capital firm SAIF Partners, will
also be participating.
"The new round is expected to value the company at close to $5 billion,"
said one of the people cited above. The money will be deployed across all
of Paytm's businesses — digital payments, online marketplace and the
upcoming payments bank, the person said.
Paytm was valued at $2.3 billion in the last round of capital infusion in
June.
Paytm E-commerce Pvt Ltd, set up earlier this month, will house the
marketplace and is expected to initially mirror parent One97's
shareholding.

44
 14.CASE STUDY-OLA

Ola Cabs was founded on 3 December 2010 by Bhavish Aggrawal

currently CEO, and Ankit Bhati. As of 2017, the company has expanded
to a network of more than 600,000 vehicles across 110 cities. In
November 2014, Ola diversified to incorporate autos on trial basis in
Bangalore.[4] Post the trial phase, Ola Auto expanded to other cities
like Delhi, Pune, Chennai and Hyderabad and Kolkata starting December
2014. In December 2015, Ola expanded its auto services
in Mysore, Chandigarh, Indore, Jaipur and Guwahati, Visakhapatnam.
Ola was valued at $US5 billion as of September 2015.[5]

In March 2015, OlaCabs acquired Bangalore based taxi service

TaxiForSure for about $US200 million. From the 25th of June 2015, Ola
users have gained access to TFS cabs via the Ola mobile application. By
November 2015, Ola had acquired Geotagg, a trip-planning applications
company, for an undisclosed sum to strengthen its new bus-shuttle
service.

Ola provides different types of service, ranging from economic to luxury

travel. The cabs are reserved through a mobile app and the service
accepts both cash and cashless payments with Ola money.[10] It claims to
clock an average of more than 150,000 bookings per day and commands
60% of the market share in India. November 2014 Ola also started on-
demand auto rickshaw service on its mobile app in Bangalore, Pune and
now available in 73 cities.

45
Ola is India's most popular mobile application for booking your cab,
changing the way you travel in your city, forever! We bring together cab
drivers and customers using technology to make transportation hassle free
for everyone.

Booking a cab for a customer and connecting to a customer for a driver

has never been more efficient or easier than this before. By not owning a
single cab, we foster entrepreneurship at the driver level by enabling him
to own the car and grow his business!

As one of India's fastest growing companies, we are making it possible

for lakhs of our users to never have to own a car or drive again and make
available Transportation as a Service on Indian road

46
 FUNDING ROUNDS

AMOUNT / LEAD
DATE INVESTORS
ROUND INVESTOR

₹10B / Debt
Sep, 2017 Yes Bank 1
Financing

$36M / Private Tekne

Aug, 2017 1
Equity Capital

$50M / Private Tekne

Jun, 2017 1
Equity Capital

₹6.7B / Private Falcon Edge

May, 2017 2
Equity Capital

$330M / Private
Feb, 2017 SoftBank 2
Equity

Dec, 2015 $57.3M / Series G Vanguard 1

Baillie
Nov, 2015 $500M / Series F 6
Gifford

Apr, 2015 $400M / Series E DST Global 9

47
 AMOUNT / LEAD
DATE INVESTORS
ROUND INVESTOR

SoftBank
Oct, 2014 $210M / Series D 1
Capital

Sequoia
Capital
Jul, 2014 $40M / Series C 4
Steadview
Capital

Nov, 2013 $20M / Series B — 2

Tiger Global
Apr, 2012 $5M / Series A 1
Management

Apr, 2011 $330k / Angel — 3

48
 INVESTORS
INVESTOR ROUND(S)

ABG Capital Series E

Accel Partners Series E

Anupam Mittal Angel

Baillie Gifford Series F (Lead)

Didi Chuxing Series F

Series E (Lead)
DST Global
Series F

Series E
Falcon Capital
Series F

Falcon Edge Capital Private Equity (Lead)

GIC Series E

Kunal Bahl Angel

Matrix Partners Series B

49
 INVESTOR ROUND(S)

Matrix Partners India Series C

Mauritius Investments Series E

Rehan yar Khan Angel

RNT Capital Private Equity

ACQUISITIONS

DATE ACQUIRED AMOUNT

Mar 21, 2016 Qarth Unknown

Nov 11, 2015 Geotagg Unknown

$200M in Cash
Mar 2, 2015 TaxiForSure.com
& Stock

50
 15. CHINA, INDIA AND ISRAEL WILL BE MOST
ATTRACTIVE GROWTH OF VENTURE CAPITAL

While overall investment levels are expected to be lower, the KPMG

survey found that 2009 funding will be targeted toward key geographic
regions and industry segments. In addition, the KPMG survey found that
venture investors do not see the IPO market improving for at least a year,
and only a small portion of portfolios are poised for exit in 2009.

While overall investment levels are expected to be lower, the KPMG

survey found that 2009 funding will be targeted toward key geographic
regions and industry segments. Respondents indicated that China, India
and Israel will be the most attractive regions for venture capital, while
cleantech, life sciences, mobile and digital entertainment will remain the
hot industries.

‘While overall funding will decrease, venture capitalists will continue to

invest in those areas they feel will provide the best return on investment,’
said Brian Hughes, KPMG partner based in Philadelphia and co-leader of
its venture capital practice. ‘Not surprisingly, they continue to be bullish
on emerging markets and industry sectors, such as cleantech, that project
near term growth.’

In polling 270 venture capitalists, corporate buyers and entrepreneurs,

KPMG found that 73 per cent of respondents expect their firm’s revenue
to stay the same or increase in 2009. In fact, 52 per cent expect revenue
growth to increase, including 37 percent who predict revenue growth in
excess of 10 percent. Only 26 per cent see declining revenues in the year
ahead.

51
The outlook on sustained revenue growth is the silver lining to a tough year
that has seen the fewest venture capital portfolio companies go public since
1977. In fact, the KPMG survey found that venture capitalists expect the
negative IPO trend to continue in 2009, with 88 per cent of respondents
expecting IPO activity to stay the same or to decline further. Additionally,
82 per cent of venture capitalists surveyed indicated that they do not
anticipate recovery in the IPO market for at least 12 months. The outlook
on IPO activity has clearly impacted venture capital exit opportunities, and
80 per cent of respondents said less than 20 per cent of their portfolio is
poised for exit in 2009.

The decline in IPO opportunities coupled with the expected, continued

regression in valuations of venture-backed companies, may influence the
venture capital community to see acquisitions as liquidity and exit
opportunities. When asked about valuation of venture backed companies,
84 per cent of respondents predicted decreasing valuations, while only six
percent see an increase. With valuations declining, 58 percent of
respondents see M&A increasing next year.

‘There is no question that economic and market conditions have made the
current environment difficult for venture capitalists,’ said Packy Kelly,
KPMG partner based in Silicon Valley and co-leader of its venture capital
practice. ‘These conditions may lead investment firms to focus on the
health of existing portfolio companies and slow the pace of investment.
But the commercialization of products in the clean tech sector probably
contributes to a large degree to the expected growth in revenue of emerging
companies.

According to the KPMG survey, the outlook on investment levels and deal
volume for 2009 mirrors the views on IPO activity. In fact, 74 per cent of

52
respondents expect overall venture investment to decrease and 82 per cent
see a decline in deal volume. While it is uncertain when venture investment
will trend back up, 50 per cent of venture capitalists surveyed do not expect
that up-tick to occur until the second half of 2009, while 32 per cent predict
it will not happen until 2010 or beyond. Only 18 per cent predict the
turnaround in venture funding will start in the first two quarters of 2009.

While overall investment levels are expected to be lower, the KPMG

survey found that 2009 funding will be targeted toward key geographic
regions and industry segments. Respondents indicated that China, India
and Israel will be the most attractive regions for venture capital, while clean
tech, life sciences, mobile and digital entertainment will remain the hot
industries. ‘While overall funding will decrease, venture capitalists will
continue to invest in those areas they feel will provide the best return on
investment,’ said Brian Hughes, KPMG partner based in Philadelphia and
co-leader of its venture capital practice. ‘Not surprisingly, they continue to
be bullish on emerging markets and industry sectors, such as cleantech,
that project near term growth.”

Another indication of the current market conditions’ negative impact on

the venture community can be seen in attitudes toward start-up investing.
Ninety-seven per cent of venture capitalists surveyed said the credit crisis
will have an adverse effect on the availability of venture financing to start-
up companies, and 73 per cent said it will be harder to get debt or lease
financing.

53
 16. PRIMARY REASONS FOR VENTURE CAPITAL
INVESTORS EXPANDING GLOBALLY

Among the primary reasons VCs around the world are interested in
investing globally is to take advantage of higher quality deal flow-
particularly in the United States, China, parts of Europe, and Israel. This is
especially true for non- U.S. firms. A second reason is the emergence of an
entrepreneurial environment, again and notably in China, but also India.
Among U.S. firms, this latter rationale is the most significant motivation
for investing globally. Other motivators include access to quality
entrepreneurs, diversification of industry and geographic risk and access to
foreign markets.

40
34
35
31
30 28 global US non US

25 22
19
20 17
16 16
14 14
15 121212 12
11
9
10
5 5 6
5 2 3

Primary reasons why investors expanding globally venture

54
Above chart reveals that 19% U.S. respondents are expand globally for
generating high quality deal flow. And 31% believe that expand globally
for getting benefit of emergence of entrepreneurial environment. Whit 17%
respondents of non U.S are expanding globally for diversification of
industry and geographic risk. All respondents are least concerned about
low cost of locations.

17. INVESTING GLOBALLY BY INVESTING LOCALLY

One way to build a comfort zone for global investing and to take advantage of
opportunities abroad is to invest locally in companies with operations outside
their home country, as opposed to investing directly in foreign countries. This
year, there was a significant increase in the number of respondents who
indicated that a sizeable number of their portfolio companies have a
considerable amount of operations outside the country in which they are
headquartered.

A significant number, 88 percent of U.S. respondents and 82 percent of non-

U.S. respondents, indicated that at least some portion of their portfolio has
significant operations outside of the country of headquarters. Again, moderation
is evident as more than half of those indicated that less than 25 percent of their
portfolio had significant foreign operations. Nonetheless, these numbers have
increased significantly from prior years and reflect an increased trend in this
method of investment.

55
 35
32 32 32
30
30
25 Global U.S. Non- U.S.
25
21
20 18 18
17
15 15
15
12 12

10 9

5
5 3
2 2

0
0% 1-10% 11-25% 26-50% 51-75% 76-100%

Percentage of venture capital firms portfolio companies that give

significant operation outside the country

Globally and among U.S. respondents, China has become the primary choice
for relocating manufacturing operations, while India is the primary choice For
R&D operations. Engineering operations tend to land in India as well, but China
is also a popular location. For back office activities, again the choice is India.
However, for non-U.S. respondents, the United States is the primary choice for
R&D and engineering while European respondents preferred Central and
Eastern Europe for manufacturing R&D and Engineering.

One reason why this approach is taking off is that investors are concerned about
intellectual property and liquidity events and in general they feel a need to be
closer to top management. This also reflects a new reality from day one
companies that reflect a larger global entrepreneurial sector. This strategy
allows the portfolio companies (and investors) to take advantage of cost saving
and access o talent in foreign markets while protecting intellectual property.
There are however concerns that such a trend could result in the U.S. losing its
R&D edge.

56
 18. IMPEDIMENTS TO GLOBAL INVESTING

For all the benefits of overseas investing, VC firms encounter a variety of risks
and challenges abroad. Both U.S. firms and non-U.S. firms perceive the U.S as
the country where the cost of complying with regulation is too high. In fact, the
percentage of non-U.S. respondents who indicated this as a concern leaped from
28% last year to 41% this year. Globally, 4% more, 44% saw this issue as a
concern. 46% of U.S. respondents believe the cost of complying with corporate
governance is too high.

50 46
44
45 41
40 Global US Non US
35
30
25
20
15
10 897 7
9
7
5 5 555 6
435 4 3 3
5
334 32
5
5 2 2
0

Top markets where the cost of complying with corporate governance

regulation too high

From the above chart we can see that most of the respondents believe that U.S.
has high cost of complying with Corporate Governance regulation and China,
India, Israel and Canada cost of complying with corporate governance
regulation too high.

57
 19.CONCLUSION

The study provides that the maturity if the still nascent Indian Venture
Capital market is imminent.

Venture Capitalists in Indian have notice of newer avenues and regions to

expand. VCs have moved beyond IT service but are cautious in exploring
the right business model, for finding opportunities that generate better
returns for their investors.

In terms of impediments to expansion, few concerning factors to VCs

include; unfavourable political and regulatory environment compared to
other countries, difficulty in achieving successful exists and administrative
delays in documentation and approval.

In spite of few non attracting factors, Indian opportunities are no doubt

promising which is evident by the large number of new entrants in past
years as well in coming days. Nonetheless the market is challenging for
successful investment.

Therefore Venture capitalists responses are upbeat about the attractiveness

of the India as a place to do the business.

58
 20. WEBLIOGRAPHY
1. https://www.crunchbase.com/organization/ani-
technologies#/entity
2. https://www.crunchbase.com/organization/paytm
3. https://en.wikipedia.org/wiki/Ola_Cabs
4. https://en.wikipedia.org/wiki/Paytm
5. https://en.wikipedia.org/wiki/Venture_capital
6. https://www.forbes.com/forbes/welcome/?toURL=https
://www.forbes.com/sites/georgedeeb/2016/07/18/what-
exactly-is-venture-capital
7. https://yourstory.com/

59