Venture Capital and Transnational Links

The VC industry has been gaining increasing interest worldwide for its ability to foster and sustain innovation and entrepreneurship. In India, the concept of risk capital is relatively new, as the liberalization of the economy in 1991 was the single most important factor in opening up the way for foreign and private venture capitalists.

As you saw in chapter 17, India's software industry is one of the fastest -growing sectors in the economy. The characteristically high-risk, high-gain nature of this industry makes VC funding an extremely suitable form of financing. Software ventures also need strong management support and guidance, and VC funding provides this critical asset for the growth of Indian software industries.

Historical Perspective of the Indian VC Industry

At present, the Indian VC industry is in a state of rapid development. Built on a foundation of small- and medium- sized enterprises and a strong public equity market, the progressive successes of NRIs and domestic Indian software firms have combined to push for much needed government initiatives to facilitate the development of a nascent, but promising VC industry.

The Indian VC industry outlook seems gloomy in the short term , as many investments have been based on Internet projects that have dried up considerably since the dot-com bust. However, NASSCOM still maintains its projections for India becoming one of the top five locations for the creation of technology ventures in the world, confident that with the right groundwork , the necessary VC funds will flow into the country.

While the beginning of the VC industry in India was spurred by economic reforms in 1991, the second phase of VC growth began with the release of Securities and Exchange Board of India (SEBI) guidelines in 1996. These guidelines for domestic and overseas funds freed the industry from many inhibiting governmental barriers in investing, and led to the increase of competition with the entry of numerous foreign funds. The resulting access to capital and international industry standards created the beginning of a more institutionalized VC industry in India.

Because general lending conditions in India have been expensive, private methods of self-financing have been the most common means of starting a business. However, VC in India has expanded since 1998 with the operations of large global banks and corporate and VC funds, both Indian and American.

Chronology of the Growth of the Indian VC Industry

• Phase 1: Post Independence (1947 “1984) ” Among other reasons, closed-economy government policies led to the emigration of India's most brilliant engineers and scientists to seek opportunities overseas beginning in the 1950s. Originally claimed as India's brain drain, they are now being increasingly recognized as a source of information, advice, and capital gains for India's VC industry needs.

• Phase 2: The Gandhi Legacy (1984 “1991) ” The election of Rajiv Gandhi in 1984 paved the way for regulatory reforms needed to develop a domestic VC industry. The Ministry of Finance issued the first set of guidelines in 1988 to legalize VC operations in India and the Industrial Credit and Investment Corporation of India (TDICI) became the first firm to identify itself as a VC operation. ^[10] In 1991 the Indian government made widespread policy changes to loosen investment regulations.

• Phase 3: The Current Scenario (1995 “2002) ” In 1995 the availability of risk capital under Indian management drastically increased after Draper International's decision to become the first major MNC to invest in India, combined with a relative decline in the part played by multilateral development agencies and government financial institutes. ^[11] These changes were followed by the release of SEBI's first guidelines for VC registration and investments in India, which further intensified investments from overseas and domestic sources.

There has been a notable increase in both domestic and foreign VC investments since the 1991 economic reforms. While only eight domestic VC funds were registered with the SEBI in 1996 “1998, with the addition of 20 new VC funds in 2000, over 30 additional funds were registered in 2000 “2001. Total VC investment ^[12] in the first three quarters of 2000 was $79.9 billion, an astounding 137% increase over the corresponding period in 1999. Of these investments, technology firms received about 75%.

In 1999 the government made additional reforms after viewing a decade of NRI and domestic IT successes in high-tech industries, and in January 2000, SEBI came out with a committee report on VC with specific recommendations, some of which were adopted by the Ministry of Finance as early as June of that year.