International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 15

Volume 6, No. 6, June 2017

Role of Venture Capital Financing in India

G. Srinivas, Assistant Professor of Commerce, Government Degree College Huzurabad, Distt.

Karimnagar, Telangana State

ABSTRACT and high-growth. Unlike banks and other financial

institutions, where the borrowing entrepreneurs are
The study is to assess the major role the Venture Capital required to pay only the loan amount with interest, in the
funding plays in India. The Venture capital fund is a vital case of venture capital financing, funds come as a part of
equity source for start-up industries, for the growth of the ownership in the form of company shares in exchange, to
Indian economy and provides a life saving support for new ensure that the shareholders have the limited control, can
industries in the prevailing financial markets. Through the express their opinions, judgment and have say in the
venture capital process, the funds are given by company affairs to direct them in the future.
professional business groups to invest in certain
innovative companies, alongside their management, which VENTURE CAPITAL IN EMERGING
are likely to demonstrate rapid growth and have an ECONOMIES: NETWORKS AND
adequate potential to contribute to significant economic INSTITUTIONAL CHANGE
development.
In this global scenario, the emerging economies have
Venture capital signifies that, “Your ideas should flourish
turned more mature with all kinds of revolutionary
with Our Finance,” so as to promote entrepreneurs in
transformations, characterized by comprehensive
innovations, to convert their scientific knowledge and
technological innovations and the fundamental design of
technological ideas into a commercial creation and
subtlety and refinement. The venture capitalists envisage
invention. India has shown a significant growth in science,
maximum potential for growth in such functions of
and technological fields in manufacturing and IT
institutional transformations, as they prefer such
industrial segments.
environments that primarily differ from other mature
The study will assess the role of Venture Capital in markets. In India, when the global fastest growing
Emerging Economies, the Global Model of Venture economy is in transition, entrepreneurial firms expect and
Capital, the Structure of Capital Markets and financial try to implement dramatic and rapid shifts in business and
institutions, and how to create the Environment for institutional environments. Such drastic shifts encounter
Venture Capital in India to ensure better perspectives for various challenges that entrepreneurial firms have to face,
the Indian economy. because, they do not seek only the way to survive, but they
have the drive to prosper in this rapidly evolving
Keywords environment with successful institutional changes. Several
research studies have been made to focus on certain
Financing, Venture Capital, Capitalists, Equity Capital, institutional changes and witnessed their impact on
Banks, Financial Markets, Investment Banking, economic development. But the evolutionary rate of
Evaluation, Funding Process institutions in this transition economy normally has the
tendency to be less predictable, while bringing faster
INTRODUCTION changes. The high technological machinery of
entrepreneurial firms in India needs to deploy grounded
This article is basically to study the framework to methodology, and applicable theory to comprehend the
understand the role of venture capital practices in the effective ways the entrepreneurial ventures must work
emerging market. At the time of starting a new company, together and integrate to cope with speedy institutional
entrepreneurs turn to several financing options, one of changes, yet manage to be successful and prosper (Nahata,
them is venture capital, where the borrowed funds provide Hazarika & Tandon, 2014).
support to build a new firm, which possesses the expertise,
qualities and characteristics to make something provable The fast emerging economies normally lack enforcement,
and those considered to demonstrate high risk potential the regulations, and business rule of laws that venture

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International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 16
Volume 6, No. 6, June 2017

capitalists normally observe in establishing traditional The main theme of Global Model of Venture Capital is to
economies. Here we explore the ways venture capitalists provide some context to understand the entire operating
develop and utilize networking relationship with system of venture capital industries. This includes the
entrepreneurs, with other venture capitalists, various entire information concerning the industry nature, size, the
enterprises, and many informal institutions to apply and main players, the nature and amount needed as venture
administer different ways and means of investments to capital investments. (Liang & Yu, 2011).
replace weaker formal institutions, which are unstable
lacking complete business knowledge in the emerging Thereafter, a detailed investigation needs to be conducted
markets. Networking and Institutional Change theory adds to ascertain the methodology by creating a venture capital
cultural and social elements, that provide better socialized model to take investment decisions. Normally, the venture
clarification regarding the effect and strength of capitalists utilize the standardized framework of generic
networking, which affects every function of venture criteria, which identifies all six-stages of the proposed
capitalist. The grounded theory and methodology is to model. The origination process, screening of specific
gather data concerning institutional consequences on venture capital firms, using generic screening method, the
venture capital. Four fundamental venture capital initial and primary phase evaluation method, the further
functioning categories are; selection of companies with and second stage of evaluation, and finally the closing
due diligence; monitoring and structuring; value added stage. Every act is to evaluate and perform different
activities, and exit procedures. Evaluating the company activities that occur at every stage. It is understood that the
activities and expertise is specifically vital considering venture capitalists provide an intensive information
inadequately enforced legal system, hence brings several concerning demand side and supply-side of marketing
obstacles. Therefore, developing relationship through benefits (Woike, Hoffrage & Jeffrey, 2015). Using the
networking is an adequately stable way to influence the technique of computer simulation, the impact of various
direction of the company. Also, exiting the venture is strategies can be investigated concerning the venture
constrained because listing the company has a limited capital financial performance. If we assess and compare
scope, while the corporate market control remains weak, ordinary heuristics, offering equal, fast, frugal and more
enforcing the bankruptcy code also does not exist. complex learning machine with regression model, we can
Therefore, in the emerging economic conditions, the analyze the influence of three stages learning venture
networking method is applied to obtain precise capital, the statistical characteristics and properties
information, effective monitoring, to follow rules of law, concerning the environment for investment, and the total
for contract enforcement. Analyzing the overall system, business plan information available. We can evaluate the
The overall analysis indicates the networking impact, with performance related to decision strategy, linked to the
respect to changing institutional systems in case of outcome of decision quality that can change drastically
transitional progression in the emerging economy between the environmental factors holding various
(Ahlstrom & Bruton, 2006). statistical relationships between business plans data
contains and related financial success. The similar
TOWARDS A GLOBAL MODEL OF circumstances arise in case of more complex and
VENTURE CAPITAL competitive strategic investment decisions, while its
performance remains robust in the entire environment. It is
It is not necessary that the venture capitalists invest funds the best way to learn those business plans, which simulate
only in the starting period of the company. They also and guide VC investments. The overall results clarify the
continue funding at multiple stages, depending on the difference in decision strategies differ to that of the impact
company's progress. NVCA- National Venture Capital generated due to additional information about decision
Association research study revealed certain spectacular outcome. Finally, there is a need to evaluate the real-world
investments made by venture capitalists in 2010, investing implication VC practices, study and research on precise
around $24 billion in 2,770 companies, out of which, VC surety in decision making (Anjos, Fernando &
1,000 companies accessed funds at the initial stage of the Drexler, 2015).
company. (Lerner & Tåg 2013). The most popular
companies which received venture capital funds in the VENTURE CAPITAL AND THE
startup period are Compaq, Apple, Google and Microsoft STRUCTURE OF CAPITAL MARKETS:
(Lerner & Tåg 2013). BANKS VERSUS STOCK MARKETS

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International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 17
Volume 6, No. 6, June 2017

The Capital Market is perhaps the highly preferred and venture capital investors. It can be done using public
widely hunted markets. Both markets of bonds and stocks offering initially, by which venture capitalists can exit
are always closely studied, their daily movements are from their portfolio investments. There is a need to study
rigorously analyzed and followed as they remain proxies to understand venture capital procedures of contracting,
for the overall economic affairs of the entire global the venture capital market, quick exit procedures by VC
markets. Hence, those operational capital market investors; and systematic exit process by preliminary
institutions like commercial banks, stock exchanges, and public offering (Gilson & Black, 1997).
similar kind of corporations, non-banking institutions like
mortgage banks and insurance companies are cautiously CREATING AN ENVIRONMENT FOR
scrutinized (Da Rin, Nicodano & Sembenelli, 2006). VENTURE CAPITAL IN INDIA
There are similarities and differences between money and The VC- Venture Capital institution is too complex to
capital markets. Viewing from the seller or issuer commence because of policy intervention, specifically in
standpoint, these two markets generate required business this developing country like India, where an unstable
functions, sustaining enough funding levels. The seller’s macroeconomic environment persists, with the historical
market goal depends on their time based liquidity needs. use of national funds and state capital involvement
While the buyers or investors pursue the market, prevails in the industrial production composition. India
investments with unique reasons. There is a higher risk in carries several of such constraints. The year 1985 emerged
capital market investments, whereas, the money markets with flourishing software industries, generating the best
bring safe assets; the returns from money market are raw materials venture capitalists are looking to finance.
steady but low, and the capital market offers better and Thus, the industry received the fundamental precondition
high returns. The capital market magnitude of returns has for the growth of venture capital funds. This generated
a clear connection to risk level, but this is not always (Da booming industry of venture capitalists. After different
Rin, Nicodano & Sembenelli, 2006). setbacks, little success was realized mainly because of
slow molding processes of environmental regulations and
Even though all markets demonstrate long term efficiency,
rules, related to permit institutions. The overseas Indians
those exhibit short-term inefficiency provide investors to
assisted with their roles in the success of Silicon Valley
exploit on irregularity to gain higher rewards, which at
entrepreneurs in the later part of the twentieth century.
times go out of control with respect to risk level. These
Yet, the combined work of practitioners and policymakers
exact anomalies all the capital market investors try to
is to be processed to give a proper shape to the Venture
evaluate and study. Even though, money market is known
Capital institution (Landstrom & Mason, 2014).
to be safe, the investors encounter negative returns.
Unexpected risks, that may be unusual, always an inherent Venture Capital has turned out to be the driving force in
risk in investments, even in the case of short or long term, every business sector for quick economic growth and
capital and money market can be very risky at times (Da industry developments. Its importance is growing faster in
Rin, Nicodano & Sembenelli, 2006). all sectors, as can be seen, there are many famous
companies world over who have received VC or funding
The USA has several small banks in relation to large
from business angels in their initial company
companies. They play a restricted role in terms of
development. Hence, it is necessary that business
corporate governance, and well established stock market
managers and entrepreneurs understand the precise tools,
and associate markets to gain corporate control. In another
strategies, and techniques to secure financial support from
way, Germany and Japan have less, but larger banks, those
the VC. India needs to explore and evaluate the
play a very dynamic role of central governance. But, they
importance and value of the globalization modules of the
do not possess corporate control active market rules. Bank
VC Institution (Lerner, Leamon & Hardymon 2012).
procedures and rules in relation to stock and capital market
system have systematic differences between their systems, This modular framework is elaborate, extensive, intended
because the venture capital stock market systems possess to educate entrepreneurs to understand how in the initial
greater vitality. To understand the connection between stages of company starting, funding is generated and
venture capital and stock market needs an awareness of procured from venture capital companies, and further to
contractual arrangements of entrepreneurs with venture access and evaluate the ways and strategies that help
capital providers; specifically while entering into an working alongside the industries and how to manage
implied contract control, which permits successful investments. This criteria stays inline with the Private
entrepreneurs to reacquire the company share value from

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International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 18
Volume 6, No. 6, June 2017

Equity modules, Entrepreneurial Finance, which offers an of private equity or investment banking (Lerner, Leamon
elaborate information on the analysis and production of & Hardymon, 2012).
company financial status and information for the
entrepreneurs to understand, and the extensive array of Investment Banking
debt / equity financial schemes and methods available
Venture capitalists, private equity investment firms and
(Lerner, Leamon & Hardymon 2012).
bankers generally offer support to secure funds from
This kind of modular framework provides an elaborate different other investors. While investment bankers utilize
knowledge of the capital investment procedures, decision financial markets, that includes equity and debts to finance
making and screening processes, business proposal, corporate transactions. Bankers also help finance different
selecting and negotiating techniques, structure to make the companies to form acquisitions, and mergers, sell debt
deal, following up on the amount of investments made and shares and equity in capital markets, may be through
exiting formats (Landstrom & Mason, 2014). restructuring corporation management. For example, in the
year 2012, the investment banker pay structure changed as
VENTURE CAPITAL, PRIVATE EQUITY per the Bloomberg published article. At that time, very
AND THE FINANCING OF less bankers were entitled to gain bonus during year end,
and they were also earning bigger salaries (Lerner,
ENTREPRENEURSHIP Leamon & Hardymon, 2012).
The venture capital or Risk Capital, private equity,
Regulation
investment banking develops the financial service system.
However, the structure of their fund investment is unique. Financial regulations have become very stringent due to
Private equity firms are the factions of private investors. the 2008 economic and financial crisis, that led to the
They use their funds to buy assets or the complete formation of the Dodd-Frank law, which governs major
businesses. Venture capitalists invest funds to new parts of financial service industry. Due to this, investment
entrepreneurs in their start up businesses, as they can banking rules have turned excessively large and
acquire more resources to develop the business. cumbersome to deal with, as per The New York Times
Investment banks have several other functions (Lerner, article of 2012. It states that all the Private equity
Leamon & Hardymon, 2012). companies were under inquiry and scrutiny, as they
pocketed more profits than their share from every deal.
Private Equity This was published in an article on Bloomberg in
September 2012. They claimed that the VC companies
Investors of Private equity merge multiple investor assets
to implement transactions. They pool all resources, and sidestepped the normal lawful, but expensive procedural
purchase sections of any business or take control of the needs of registering with government regulations
company in distress. However, they do not take business stipulated by the Dodd-Frank rules, which mainly
ownership permanently. Instead, they create an exit considers a break for such firms (Lerner, Leamon &
Hardymon, 2012).
strategy. These Private equity companies try to improve
the acquired business so as to sell with a substantial profit.
Such equity measures are risky due to their large
CONCLUSION
investments to clear debt and to complete the deal (Lerner, The VC can provide a large amount of funds for
Leamon & Hardymon, 2012). businesses and for capital development that is not feasible
through any bank loan or any other conventional means.
Venture Capital
Venture capitalists also provide relevant business
The investment banking and private equity offer service
expertise, connected with industrial progress and those
facilities to various corporations having a good operating
guidance and mentoring processes is extremely valuable.
reputation and history. Venture capitalists invest in the
early stages of business operations. They are prepared to Legal costs and accounting processes make the fund
take additional risks to fund new businesses, so as to help securing procedure through VC very difficult. In case a
commence business operations and earn profits. This requisite deal is secured, the investors of VC will
provides new businesses the requisite initial funds and primarily get drawn in to decide on company affairs,
turns an attractive proposal than to avail funds from those strategies and directions.

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International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 19
Volume 6, No. 6, June 2017

However, Securing the capital from VC is very role of venture capital. Review of Financial studies,
cumbersome, while the funds invested in any innovative 13(4), 959-984.
venture may have a huge potential for profits as well as
risks of losses are rigorously evaluated and considered. [7] Lerner, J., Leamon, A., & Hardymon, F. (2012).
(Hellmann & Puri, 2000). Venture capital, private equity, and the financing of
entrepreneurship.
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