Venture capital industry in India is still in its early stages and to give it
a proper fillip it is important to develop related infrastructure as has been
successfully done internationally specially in US, Taiwan and Israel.
Following areas need due attention.
Incubators: Incubators are mostly non profit entities that provide value
added advisory, informational and certain support infrastructure which
includes productive office environment, finance and complementary resources.
Incubators are mostly promoted by Government or professional organisations
seeking to develop small enterprises in a particular area. In US even city
government have promoted several incubators to capture a portion of Silicon
Valley high technology business. Some times venture capitals funds also have
their own incubators and companies also set up in-house incubators.
Incubators typically give a very initial stage support to young entrepreneurs
who want to develop their idea to a viable commercial proposition which could
be financed and supported by venture capitalist. Incubators have been started
by Government and public institutions, to encourage young talent by providing
initial facilities and finance has really helped countries like US, Israel,
Taiwan etc. According to US SBA statistics about 25% of incubator firms are
successful (defined as profitability within 5 years of establishment).
Increasingly there are transnational incubators in Silicon Valley, Israel and
Taiwan which provide the head start advantage of accessing global experience
and environment to young entrepreneurs of the respective countries. In India,
Central and State Governments, public institutions should support and set up
incubators. Government should also consider giving infrastructural support
and other incentives including tax incentives for promotion of incubators.
There is also need to consider some successful models which have supported
venture capital activity and enterprise building in a substantial manner two
such models are discussed hereunder:
U.S. Small Business Investment Company (SBIC) Program
The SBIC Program, administered by the U.S. Small Business Administration
(SBA) is the largest government support program for venture capital in the
world, and is a model to be considered, perhaps with modification, by other
nations that want to stimulate venture capital investment. In 40 years of
operation, SBICs have invested over S21 billion in nearly 120,000 financings
to U.S. small businesses, including such successes as Intel Corporation,
Apple Computer, Federal Express and America Online.
The SBIC does not distinguish between types of businesses, although
investments in buyouts, real estate, and oil exploration are prohibited. In
1998, the SBIC invested $3.4 billion in 3,470 ventures, approximately 40
percent by number and 20 percent by dollar value of all venture capital
financings. Over half that amount was given over to businesses three years
old or younger. Companies such as Apple, America Online, Intel and Sun stand
as some of the SBIC�s more famous past financings, but the lesson of its
success lies in successfully financing thousand of small, unknown firms.
The basic objective of the program is to attract and supplement private
capital for venture capital funds (SBICs), managed by private investment
managers, that invest in small companies that would not otherwise be able to
raise capital from purely private sources. Many require amounts of capital
greater than that available from individuals, but less than the minimum
required by private venture capital firms. In this program, SBA licenses,
regulates, and agrees to provide two thirds of the total capital of an SBIC
with the remaining one third provided as equity by private investors such as
insurance companies, foundations, endowments, wealthy individuals and pension
plans. The SBICs are organised and are operated just like private venture
capital funds, with all investment decisions made by the private fund
agree to abide by SBA regulations, primarily to make only direct investments
in companies small enough to meet required standards. Except for the
exclusion of a few industries, investments are not targeted by SBA. Capital
supplied by SBA requires a rate of return much lower than that expected by
the fund as a whole. Any excess flows to the private investors and fund
managers, increasing or "leveraging" their returns.
SBA funds are provided either through 10 year loans ("debentures")
or preferred limited partnership equity investments ("participating
securities"). Debentures require current payment of interest and are
used by SBICs that make loans with equity rights or features. Participating
securities, which have no current cash payment obligation, are used by SBICs
that make equity investments in small companies. The rate and fees of the
debentures to the SBIC are about 2% above the ten-year U.S. treasury rate. In
addition to this basic cost, SBICs using participating securities must pay
10% of their profits to SBA.
Funds for the program are raised by SBA in the capital markets through the
sale of debentures guaranteed by SBA and the U.S. government. In the U.S.
budget system, the only required government appropriation is a "credit
subsidy" or form of loss reserve, which now is less than 2% of the value
of the financings. This year, an appropriation of $27 million will allow SBA
to guarantee $2.3 billion of debt, proceeds of which will be made available
to SBICs with private capital of around $1.2 billion, thus making $3.5
billion available for investment in U.S. small businesses.
In addition to making 45% of the total number of equity financings made by
venture capital firms to U.S. small business last year, with an average
investment size well below that of private venture firms, the SBIC program
assists new fund managers who are raising their first funds. The program is
achieving its objectives and helping to build the venture capital industry of
The SBIC program undoubtedly has relevance for India, and it is possible a
structure could be implemented in which Indian venture capital firms
registered with SEBI could avail themselves of those funds.
The Bilateral Industrial Research and Development Foundation (BIRD), Israel
Israel�s government participates in international cooperation, seeking to
match the nation�s technical skills with global markets and to share start-up
risks up front with later-stage activities such as marketing. The most
successful of these ventures has been the Bilateral Industrial Research and
Development Foundation (BIRD). Begun in 1977 as an equal partnership with the
U.S. government, the BIRD Foundation was seeded with $110 million to fund
joint ventures between Israeli and U.S. firms. BIRD provides 50 percent of a
company�s R&D expenses, with equal amounts going to each partner. Its
return comes from the royalties it charges on the company�s revenue.
Any pair of companies, one from each country, may jointly apply for BIRD support,
if between them they have the capability and infrastructure to define,
develop, manufacture, sell and support an innovative product based on
BIRD often plays a proactive role in bringing potential strategic partners
together. In the US, the companies are mostly public or at least bound in
that direction and are engaged in the development and manufacture of high
technology products. The potential of these companies to grow is perceived as
limited only by their capacity to devise and develop new products. In Israel,
the companies BIRD recruit have leading-edge technological and production
capabilities, are flexible and are eager to join forces with an American
company in product development and commercialization.
In practice, only 25 percent of the funded projects have been successful, but
this is a satisfactory rate even for private funds. The monies BIRD has
earned on profitable projects more than offset losses made by the rest, thus
allowing the Foundation to maintain the value of its corpus, BIRD approves
about forty new projects a year, with average funding of $1.2 million for a
duration of twelve to fifteen months. It has so far funded five hundred such