Venture Capital funds are potential instruments of growth and sustainance. Venture capital is required for innovative products and services to prosper in an extremely crowded and competitive market. The main aim of venture capital is to provide seed capital investments for broadening entrepreneurial skills in the country by providing finance to technology oriented projects. A Venture Capital Fund (VCF) strives to provide entrepreneurs with the support they need to create up-scalable business with sustainable growth, while providing their contributors with outstanding returns on investment, for the higher risks they take. Venture Capital Fund can provide the following urgently needed support for a robust growtyh of industry in India:

• Finance new and rapidly growing companies

• Typically knowledge-based, sustainable, up scaleable companies

• Purchase equity / quasi-equity securities

• Assist in the development of new products or services

• Add value to the company through active participation

• Take higher risks with the expectation of higher rewards

• Have a long-term orientation

It is pertinent now to discuss how venture capital business was promoted in India. Given the virtual monopoly of public sector financial institutions and in particular Development Financial Institutions in the financial intermediation until the reform period of 1990s, the initiatives for venture capital also were taken by them. In 1975, venture capital financing was introduced by the all-India financial institutions with the inauguration of the Risk Capital Foundation (RCF) sponsored by Industrial Finance Corporation of India (IFCI) to supplement promoters' equity as means of encouraging technologists and professionals to promote new industries. In 1976, the seed capital scheme was introduced by Industrial Development Bank of India (IDBI). Until 1984, venture capital took the form of risk capital and seed capital.

The Technology Policy statement of the Government in 1983 set the guidelines for technological self-reliance by encouraging the commercialisation and exploitation of technologies developed in the country. In 1984, Industrial Credit and Investment Corporation of India (ICICI) decided to allocate funds for enterprises involving risk and high profit potential and in 1986, it launched a venture capital scheme to encourage new technocrats in the emerging fields of high-risk technology.

To popularise venture capital financing, the government took a formal initiative and announced the creation of a Venture Capital Fund (VCF) in December 1985. The VCF was to provide equity capital for pilot projects attempting commercial applications of indigenous technology and for adapting previously imported technology for wider domestic applications. The Fund which became operational in April 1986 is administered by IDBI. The source of finance was the cess levied on all payments made for purchase of technology from abroad. The first attempt to frame comprehensive guidelines governing venture capital funds was made in 1988-89. Even under these guidelines, only all India financial institutions, all scheduled banks including foreign banks operating in India, and the subsidiaries of the above were eligible to set up venture capital funds/companies. In 1988, IFCI sponsored RCF was converted into the Risk Capital and Technology Finance Corporation of India Ltd. In 1989, Unit Trust of India sponsored venture capital unit schemes. State Bank of India has a venture capital scheme operated through its subsidiary SBI Caps. ICICI flagged off a new venture capital company called Technology Development and Information Company of India (TDICI) with the objective of encouraging new technocrats in the private sector in high-risk areas. Canara Bank has set up a separate Asset Management Company (AMC) to undertake venture capital financing. The first scheme floated by Canara Bank had participation by World Bank. About the same time, two State level corporations, viz., Andhra Pradesh and Gujarat also took initiatives to promote venture capital funds and could obtain World Bank assistance. A foreign bank set up a Venture Capital Fund in 1987. In addition, other public sector banks have participated in the equity share capital of venture capital companies or invested in schemes of venture capital funds.

As reform progressed, consistent with general trends, local public sector's role was increasingly supplemented by local private initiatives in venture capital also. More important, resources from multilateral agencies like World Bank were supplemented by foreign institutional investors.

As at end-December 1996, according to Venture Capital Association of India, 14 of its members had set up 17 funds. The total pool of funds available to its members was Rs.14,019 million. In earlier years, much of venture capital financing was contributions from financial institutions followed by multilateral agencies and then the private sector. This trend has changed in the last couple of years with many offshore based funds entering this arena. Reflecting this trend, of the total funds available, 39 per cent came from all India financial institutions, 33 per cent was contributed by foreign institutional investors and over 12 per cent by multilateral agencies. Other contributors of course were banks, public and private sector organisations, insurance companies, mutual funds, etc.

As to be expected, major part of venture capital investments were in the form of equity issues. Of the total investment of Rs.6,729 million in 622 projects, about 61 per cent was in the form of equity, 21 per cent was by way of convertible instruments and 6 per cent in non-convertible debt. Redeemable preference shares and other instruments of finance including temporary and bridge loans accounted for the balance.

What is, however, somewhat surprising is that in respect of computer software or service industry in general, which are fast growing and where we have strength, venture capitalists did not find them attractive. Investment in industrial products and machinery accounted for 29 per cent of the investment, followed by 13 per cent in consumer related industry, about 8 per cent in food and food processing industry and 7 per cent in computer software and service industry. This neglect of the fastest growing high-tech sector needs some attention.

As regards participation of venture capital by stages in business cycle, majority of investments (42 per cent) was in the start-up stage, followed by over 27 per cent in later stages. Only 14 per cent of financing was in seed-stage. This is a matter for satisfaction.

Size-wise, a large proportion of venture capital went into small and medium units and the rest to larger units. It is necessary to recognise that what we consider to be small and medium is tiny by international standards. Incidentally, a small scale industrial unit in India is defined as a unit with an investment limit of Rs.3 crore. In fact, as our economy is poised to be internationally competitive, our definitions, at least as venture capital is concerned, need a second look.

It is important that the concept of venture capital funding came to be institutionalized and regulated. This funding requires different skills in assessing the proposal and monitoring the progress of the fledging enterprise. In 1996, the Securities and Exchange Board of India (SEBI) came out with guidelines for venture capital funds has to adhere to, in order to carry out activities in India. This was the beginning of the second phase in the growth of venture capital in India. The move liberated the industry from a number of bureaucratic hassles and paved the path for the entry of a number of foreign funds into India. Increased competition brought with it greater access to capital and professional business practices from the most mature markets.

There are a number of funds, which are currently operational in India and involved in funding start-up ventures. Most of them are not true venture funds, as they do not fund start-ups. What they do is provide mezzanine or bridge funding and are better known as private equity players. However, there is a strong optimistic undertone in the air. With the Indian knowledge industry finally showing signs of readiness towards competing globally and awareness of venture capitalists among entrepreneurs higher than ever before, the stage seems all set for an overdrive.

The Indian Venture Capital Association (IVCA), is the nodal center for all venture activity in the country. The association was set up in 1992 and over the last few years, has built up an impressive database. According to the IVCA, the pool of funds available for investment to its 20 members in 1997 was Rs25.6bn. Out of this, Rs10 bn had been invested in 691 projects.

Certain venture capital funds are Industry specific(ie they fund enterprises only in certain industries such as pharmaceuticals, infotech or food processing) whereas others may have a much wider spectrum. Again, certain funds may have a geographic focus - like Uttar Pradesh, Maharashtra, Kerala, etc whereas others may fund across different territories. The funds may be either close-ended schemes (with a fixed period of maturity) or open-ended.

Early stage funding is avoided by most funds apart from ICICI ventures, Draper, SIDBI and Angels. Funding growth or mezzanine funding till pre IPO is the segment where most players operate. In this context, most funds in India are private equity investors.

The size of investment is generally less than US$1mn, US$1-5mn, US$5-10mn, and greater than US$10mn. As most funds are of a private equity kind, size of investments has been increasing. IT companies generally require funds of about Rs30-40mn in an early stage which fall outside funding limits of most funds and that is why the government is promoting schemes to fund start ups in general, and in IT in particular.

The venture funds can have a totally "hands on" approach towards their investment like Draper or "hands off" like Chase. ICICI Ventures falls in the limited exposure category. In general, venture funds who fund seed or start ups have a closer interaction with the companies and advice on strategy, etc while the private equity funds treat their exposure like any other listed investment. This is partially justified, as they tend to invest in more mature stories.

In addition to the organized sector, there are a number of players operating in India whose activity is not monitored by the association. Add together the infusion of funds by overseas funds, private individuals, 'angel' investors and a host of financial intermediaries and the total pool of Indian Venture Capital today, stands at Rs50bn, according to industry estimates!

The primary markets in the country have remained depressed for quite some time now. In the last two years, there have been just 74 initial public offerings (IPOs) at the stock exchanges, leading to an investment of just Rs14.24bn. That's less than 12% of the money raised in the previous two years. That makes the conservative estimate of Rs36bn invested in companies through the Venture Capital/Private Equity route all the more significant.

Though the infotech companies are among the most favored by venture capitalists, companies from other sectors also feature equally in their portfolios. The healthcare sector with pharmaceutical, medical appliances and biotechnology industries also get much attention in India. With the deregulation of the telecom sector, telecommunications industries like Zip Telecom and media companies like UTV and Television Eighteen have joined the list of favorites. So far, these trends have been in keeping with the global course.

However, recent developments have shown that India is maturing into a more developed marketplace, unconventional investments in a gamut of industries have sprung up all over the country. This includes:

1. Indus League Clothing, a company set up by eight former employees of readymade garments giant Madura, who set up shop on their own to develop a unique virtual organization that will license global apparel brands and sell them, without owning any manufacturing units. They dream to build a network of 2,500 outlets in three years and to be among the top three readymade brands.

2. Shoppers Stop, Mumbai's premier departmental store innovates with retailing and decides to go global. This deal is facing some problems in getting regulatory approvals.

3. Airfreight, the courier-company which has been growing at a rapid pace and needed funds for heavy investments in technology, networking and aircrafts.

4. Pizza Corner, a Chennai based pizza delivery company that is set to take on global giants like Pizza Hut and Dominos Pizza with its innovative servicing strategy.

5. Car designer Dilip Chhabria, who plans to turn his studio, where he remodels and overhauls cars into fancy designer pieces of automation, into a company with a turnover of Rs1.5bn (up from Rs40mn today).