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Unit 16: Venture Capital

(b) Management Buyins (MBIs): Management Buy-ins are funds provided to enable an Notes
outside group of manager(s) to buy an existing company. It involves three parties:
a management team, a target company and an investor (i.e. Venture capital
institution). MBIs are more risky than MBOs and hence are less popular because it is
difficult for new management to assess the actual potential of the target company.
Usually, MBIs are able to target the weaker or under-performing companies.
4. Replacement Capital: Another aspect of financing is to provide funds for the purchase of
existing shares of owners. This may be due to a variety of reasons including personal need
of finance, conflict in the family, or need for association of a well known name. The time
scale of investment is one to three years and involve low risk.
5. Turnarounds: Such form of venture capital financing involves medium to high risk and a
time scale of three to five years. It involves buying the control of a sick company which
requires very specialised skills. It may require rescheduling of all the company's
borrowings, change in management or even a change in ownership. A very active "hands
on" approach is required in the initial crisis period where the venture capitalists may
appoint its own chairman or nominate its directors on the board.
In nutshell, venture capital firms finance both early and later stage investments to maintain a
balance between risk and profitability. Venture capitalists evaluate technology and study
potential markets besides considering the capability of the promoter to implement the project
while undertaking early stage investments. In later stage investments, new markets and record
of the business/entrepreneur is closely examined.

16.4 Indian Venture Capital Scenario

In India the Venture Capital plays a vital role in the development and growth of innovative
entrepreneurships. Venture Capital activity in the past was possibly done by the developmental
financial institutions like IDBI, ICICI and State Financial Corporations. These institutions
promoted entities in the private sector with debt as an instrument of funding. For a long time
funds raised from public were used as a source of Venture Capital. This source however depended
a lot on the market vagaries. And with the minimum paid up capital requirements being raised
for listing at the stock exchanges, it became difficult for smaller firms with viable projects to
raise funds from public. In India, the need for Venture Capital was recognised in the 7th five
year plan and long term fiscal policy of GOI. In 1973 a committee on Development of small and
medium enterprises highlighted the need to faster VC as a source of funding new entrepreneurs
and technology. VC financing really started in India in 1988 with the formation of Technology
Development and Information Company of India Ltd. (TDICI) - promoted by ICICI and UTI. The
first private VC fund was sponsored by Credit Capital Finance Corporation (CFC) and promoted
by Bank of India, Asian Development Bank and the Commonwealth Development Corporation
viz. Credit Capital Venture Fund. At the same time Gujarat Venture Finance Ltd. and APIDC
Venture Capital Ltd. were started by state level financial institutions. Sources of these funds
were the financial institutions, foreign institutional investors or pension funds and high net-
worth individuals.
The Indian Venture Capital (VC) market has been getting more active by the day. During the
last year or so, almost all the major global VC firms have either established an on-ground
presence in India or raised significant India-dedicated funds. In 2006, VC investment levels
increased by more than 300% to almost $7.5 billion from $2.2 billion in 2005. This quantum leap
was not the result of a low base-as 2005 was a record year in itself.

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