The image that the venture capitalist has so far had is slowly withering away. For, the venture capital industry is shifting focus from untried, technology-based start-ups to safer, high-return areas. And the CFOs of start-ups seeking to raise funds to expand may just be the beneficiaries of this migration. BT describes the CFO's guide to venture capital in 2000.

By Radhika Dhawan

There's a ring of romance around venture capital financing. An aura of adventure that burnishes success stories to a near-legendary sheen. Perhaps the most famous legend of them all is Apple Computer, which started out in the US in 1977 with capital provided by an obscure venture capital firm, Arthur Rock & Co.. The rest is history. Apple Computer, with a turnover of $9.80 billion, made it to the Fortune-500, and Arthur Rock & Co. attained near-mythical stature in the venture capital industry.

Of course, there is more to venture capital financing than just nursing start-ups. It encompasses a whole gamut of activities: from providing seed capital, and supplying funds for product development and marketing expenditure, to extending bridge finance prior to an Initial Public Offering (IPO). But, almost always, the term venture capital conjures up images of funding risky and unproven, but sophisticated, technologies.

Take the case of Microland, a classic venture capital story. In 1989, technocrat Pradeep Kar approached the Technology Development & Investment Corporation of India (TDICI) for a Rs 20-lakh loan to finance a company that sold the then-esoteric concept of networking solutions. He was turned away since the business was deemed to be service-oriented--not technology-oriented.

But Kar finally managed to start up after receiving funds from the SBI Capital Markets (SBI Caps) under its Equity Support Programme. Barely a year later, SBI Caps' stake in Microland was sold to the TDICI at a premium of 100 per cent. To further sweeten the deal, the TDICI offered Kar the option to raise his stake once profitability and turnover targets were met. From these humble beginnings, Microland has morphed into a networking giant, with a turnover of Rs 150 crore and Profits After Tax of Rs 4 crore in 1996-97.

Examples like Microland have been few and far between in this country. But India's Rs 1,300-crore venture capital industry is, slowly, shifting gear. In fact, the new Securities & Exchange Board of India (SEBI) norms on venture capital provide for a remarkable degree of elasticity. In effect, no curbs have been imposed on venture capital investments.

Clearly, there is little point in spending public money to regulate high-risk private investment. With this new-found flexibility, the walls between the various subsets of venture capital financing--seed capital, start-up financing, and private equity--are crumbling. How will India's fledgling venture capital industry redefine itself? And how will it shape the solutions to your financing needs?

The Finance Need:
Identifying Sources Of Seed And Start-Up Capital

In this ERA of change, the entrepreneur with a bright idea could get short-changed. Venture capital will no longer be about seed financing--a small amount of capital extended to an inventor to prove a concept--or start-up financing--funds given for product development and marketing provided the company has been in business for a short while. Instead, it will be about extending finance to firms that have already managed to reach a certain level of operations. Confirms Vinod Harithwal, 37, vice-president, Pathfinder Fund: "We will look at investing equity in companies that have reached critical mass. Or are in the first five years of their operations."

Even the pioneers, like the TDICI, the Industrial Development Bank of India (IDBI), and the Risk Credit Technology Corporation (RCTC), are moving away from the traditional focus on start-ups. Echoes K. Ramachandran, 40, an associate professor at the Indian Institute of Management at Ahmedabad: "If the companies that claim to be in venture capital finance are plotted on a firm life-cycle curve, there is a growing vacuum at both the start-up financing, and technology-intensive firm levels."

The Structured Solutions: With this retreat, early-stage financing has largely become the preserve of the social development funds, and the financial institutions with government-enforced developmental responsibilities. Consequently, the financing package is not strictly venture capital, but largely conditional grants or low-interest loans.

Typical sponsors include the Small Industries Development Bank of India (SIDBI), the IDBI, and the funds floated by global organisations like USAID and the World Bank. There are also a handful of specialised start-up funds: the Industrial Credit & Investment Corporation (ICICI) manages some, notably the Programme for Acceleration of Commercialised Energy Research (PACER) and the Sponsored Programme for Research And Development (SPREAD). However, these funds have small corpuses and come with an innate set of restrictions.

The only foreign private equity fund in the country that includes start-ups in its investment portfolio is the Indocean Venture Advisors fund. And Indocean Venture is likely to be the exception rather than the rule. Remember: growing a small, technology-oriented project into a commercially-viable enterprise demands constant nurturing. A great deal of effort and a wealth of technical expertise must go into appraising, as well as monitoring, the project.

More