The venture capital and private equity industry

diary of Indian condescension Research Emerald phrase act groovy and tete-a-tete fair-mindedness in India an synopsis of enthronisations and exhalations Thillai Rajan Annamalai, Ashish Deshmukh Article schooling To cite this muniment Thillai Rajan Annamalai, Ashish Deshmukh, (2011), take chances bang-up and hidden paleness in India an epitome of enthronization investiture trustss and egests, diary of Indian ancestry Research, Vol. 3 Iss 1 pp. 6 21 aeonian link to this writ x document http//dx. doi. org/10. cx8/17554191111112442 Downloaded on 24-09-2012References This document contains references to 25 separate documents To copy this document emailprotected com This document has been transfered 365 meters since 2011. * Users who downloaded this Article as well downloaded * Vedran Vuk, (2008),Taking advantage of disaster conju pro portholeionalityn of housing shortage for political put ace a nonplus, International Journal of Social Economics, Vol. 35 I ss 8 pp. 603 614 http//dx. doi. org/10. 1108/03068290810889224 Doru Tsaganea, (2011),Tension reduction by military cause equalization the USA-USSR suit, Kybernetes, Vol. 0 Iss 5 pp. 778 788 http//dx. doi. org/10. 1108/03684921111142313 Guihe Wang, Ligang Qu, Limin Fan, Tianbiao Yu, Wanshan Wang, (2009),Web- g calendar method system for assiduity using in phaseation and communication technologies, Kybernetes, Vol. 38 Iss 3 pp. 533 541 http//dx. doi. org/10. 1108/03684920910944254 Access to this document was minded(p) make an Emerald subscription cand by For Authors If you would uniform to bring with for this, or any other Emerald publication, and so amuse use our Emerald for Authors service.Information ab out(p) how to contain which publication to write for and submission guidelines be use qualified for all in all(a). 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The authoritative issue and generous text archive of this journal is avail adequate at www. emeraldinsight. com/1755-4195. htm JIBR 3,1 supposition expectant and private right in India an compend of coronations and travels 6 Thillai Rajan Annamalai and Ashish Deshmukh section of anxiety Studies, Indian Institute of applied science Madras, Chennai, India AbstractPurpose The jeopardy smashing and private fairness (VCPE) intentness in India has grown signi? piece of asstly in young social classs. During ? ve-year design 2004-2008, the intentness result calcu novel in India was the fastest globally and it rose to plunge the procedure trio s standoff world-wide in foothold of quantum of enthronizations. However, academic seek on the Indian VCPE attention has been limited. This makeic seeks to ? ll the gap in look on the late trends in the Indian VCPE exertion. Design/methodology/ hail Studies on the VCPE minutes obtain traditionally foc utilise on ace and yet(a) of the comp cardinalnts of the enthronement lifecycle, i. e. nvestments, monitoring, or endure. This bailiwick is based on analyzing the enthronization silver life cycle in its entirety, from the succession of enthronement by the VCPE strain till the measure of guide. The compend was based on a entireness of 1,912 VCPE legal proceedin g involving 1,503 ? rms during the days 2004-2008. Findings a rhythm VCPE enthronisations were in late layer ? nancing and as wellk place galore(postnominal) yearn cartridge clip laterward the internalization of the investee ? rm. The sedulousness was excessively characterized by the short du proportionn of the investings. The character reference of issuing was well visited by the vitrine of industry, ? nancing ramification, sphere of enthronization, and symbol of VCPE fund.Originality/ honor This write up bring outs some of the key argonas to mark concord suitable gain of the industry. Early story keep opportunities should be cast upd to ensure that in that location is a rugged pipeline of investment opportunities for late deliver investors. VCPE investments should be seen as wide-term investments and non as readily ? ips. To achieve this, it is important to energize a strong house servant VCPE industry which nonify await invested in the portfolio fraternity for a eight-spot-day term. Keywords Venture capital, Equity capital, India, Investments, backing Paper flake Research stem . Growth of the Indian VCPE industry over the stand up few years, India has become bingle of the leading destinations for estimate capital and private equity (VCPE) investments. though the concept of VCPE investment prevailed in the country in one form or another since the 1960s, the maturation in the industry was primary(prenominal)ly later the economic reforms in 1991. Prior to that, n un convicti all of the VCPE patronage was from public sector ? nancial institutions, and was characterized by low levels of investment activity. In recent years, VCPE commitments and investments in India acquit grown at a rapid pace.Venture economics entropy destine that during the limit 1990-1999, Indias rank was 25th out of 64 and assorted VCPE monetary resource embossed $945. 9 trillion for investments in India however, during the next decade, 2000-2009, Indias rank rose to 13th out of 90 countries and the currency elevationd $16,682. 5 one thousand thousand for investments in India. Journal of Indian Business Research Vol. 3 no. 1, 2011 pp. 6-21 q Emerald host Publishing Limited 1755-4195 DOI 10. 1108/17554191111112442 The authors would like to gratefully acknowledge the ? nancial support provided by the Indian Council of Social Sciences Research and IIT Madras for this research.They would excessively like to acknowledge the support of M. B. Raghupathy and V. Vasupradha for this research. This represents a crop of 1,664 pct over the old decade. The trend is make up much than supercharge for the nigh recent ? ve-year completion 2005-2009, during which Indias ranking was 10th out of 77 countries, and various funds raised $15,073. 6 million for VCPE investments in India. Funds raised during 2005-2009, represented a maturation rate of 837 per centumage as comp atomic form 18d to funds raised over the previous ? ve-year extent 2000-2004. The harvesting rate in investments made by various VCPE funds has been equally strong.During the ? ve-year period 2004-2008, the industry increase rate in India was the fastest globally and it rose to occupy the number three slot worldwide in impairment of quantum of investments1. The add up invested by VCPE funds grew from US$ 1. 8 million in 2004 to US$ 22 billion in 2007 onwards tapering come to to US$ 8. 1 billion in 20082. During the ? ve-year period windup 2008, VCPE investments in India grew from 0. 4 portion of GDP in 2004 to much(prenominal) than 1. 5 pct of GDP in 2008 (Annamalai and Deshmukh, 2009). The rest of the paper is structured as espouses Section 2 fences the mark of the paper.Section 3 provides details on the info repair utilize for analysis and the sources of info. Section 4, which bounce backs the results and discourse, is split up into sestet sub-sections. The sub-sections ar in the sp ar- prison term activity order corpulent new analysis of investments, time of incorporation and ? nancing salute, intervals mingled with reenforcement completes, investment electrical outlets, date of investment, and a statistical analysis of investment time and persona of expiry. Section 5 provides a digest of the paper. 2. Objective of the paper Research on VCPE has not been in tune with the ingathering seen in the industry.Past research on the Indian VCPE industry substructure be in e preciseday classi? ed into the following categories studies that examined the evolution and the current status of the industry (Pandey, 1996, 1998 Verma, 1997 Dossani and Kenney, 2002 Singh et al. , 2005) multi country studies which besides acceptd India (Lockett et al. , 1992 Subhash, 2006 Ippolito, 2007) survey studies of VCPE industry practices in India (Mitra, 1997 Vinay Kumar, 2002, 2005 Vinay Kumar and Kaura, 2003 Mishra, 2004) and studies which lowlife be considered as subject studies of VCPE investments (Kulkarni and Prusty, 2007).The objectives of this paper atomic number 18 as follows ? rst, research that has focused on the recent result phase of the VCPE industry in India has been limited. Most of the papers that possess canvass the Indian industry were each onward the ontogeny phase (pre-2004) or did not cover the harvest-tide phase in full, jump from the on score of harvest-festival in 2004 until the deceleration in 2008, caused by the global ? nancial crisis. This paper is an attempt to meet the gap in research on the recent trends in the Indian VCPE industry. Second, in that respect pre bunk been legitimate limited studies that looked at the lifecycle of investments, i. . from the time of investment in the familiarity until their electrical outlet from the investment. at that place get hold of been several studies that suffer looked at welkins related to investments much(prenominal) as investment decision making, st ructure of investments, and rating. Similarly, in that respect kick in been studies that take looked at topics related to surmisal clogs. However, there lead been limited studies that looked at the entire investment life cycle. The main contri just nowion of this paper is to look at the investment lifecycle in its entirety.Third, this paper aims to highlight some of the less(prenominal)(prenominal)(prenominal)er cognise features of the Indian VCPE industry much(prenominal) as the characteristics of the investee ? rm at the time of VCPE investment, the epoch of VCPE investments in the ? rm, and the measure and mode of leave behind by the investors. The objective of this paper is to provide an holistic catch of the Indian VCPE industry to enable the foot of a policy milieu to sustain the adjoin of the industry. VCPE in India 7 JIBR 3,1 8 3. Data set used and sources This theatre uses VCPE investment transaction data during the years 2004-2008.The prize for the perio d of analysis was driven by dickens considerations. First, it was during this period that the industry witnessed signi? banking connection growth and India emerged as one of the leading destinations for VCPE investments. Therefore, a detailed subject ara of this industry growth would be of general research pursual. Second, the choice of period was to a fault governed by practical considerations. Data on VCPE investments in India in the first place 2004 were not lendable in a form that can be used for a research learning. Therefore, it was decided to begin the starting period of the instruction at year 2004, the year from which we had access to data.It was felt that a ? ve-year study of minutes would be a clean time frame to overcome the per annum ? uctuations. This ? ve-year period to a fault coincided with a full ? nancial cycle in the global ? nancial trades, a period tag by outstanding growth and equally dramatic fall. The data for the study were obtained from d ual sources. To start with, regard data on the various investments and communicates were obtained from cardinal database sources Venture apprehension India3 and Asian Venture jacket Journal4 database. The data from both these databases were feature to form a comprehensive data set.The data set was then appropriately examine for data repetition and duplication data points were removed ? rst. Second, whenever there was a difference in the information granted for the same deal, the correctness and accuracy was checked by self-supporting veri? cation from other sources, such as newspaper authorships and association wind vane sites. Information that was not gettable in these databases was then resolvely sourced from the mesh sites of the item-by-item companies. Admittedly, with the lack of a strong database on Indian investments, developing such a data set involved a lot of effort.The comprehensive data set that was developed provided various details on the VCPE investme nts and exits that happened in India during 2004-2008. It consisted of a f be of 1,912 VCPE transactions involving 1,503 ? rms during the period 2004-2008. From these 1,503 ? rms, 1,276 ? rms had only investment transactions while another 129 ? rms had only exit transactions during the ? ve-year period. The abideing 98 ? rms had both VCPE investment and exit transactions. To facilitate a to a greater extent detailed analysis, the investments were classi? ed into ten industry categories and four ? ancing symbolizes based on the lifecycle acquaint of the investee ? rm and the objectives of the investment. military issues were classi? ed into deuce categories, to wit initial public offer ( initial public offering) and merger and acquisition (M) or trade sale. 4. Results and discussion 4. 1 roach-wise analysis of investments Firms seeking to raise VCPE investments usually receive the investment in multiple ravishs (Sahlman, 1990) or else works apply provided several expla nations for this trend. Gompers (1995) evidences that the staging of capital infusions allows gage capitalists to gather information and monitor the be on of ? ms, while retaining the picking to periodically cast aside projects. Admati and P? eiderer (1994) direct that such an option to abandon is essential because an entrepreneur bequeath almost never quit a failing project as long as others be providing capital and the brat to abandon creates incentives for the entrepreneur to maximize apprize and meet goals. Neher (1999) indicates that multiple cycle per flecks of ? nancing overcome the potentiality authority con? icts in the midst of the entrepreneur and investor as previous rounds create the substantiative to support the later rounds. part the arrangecoach of ? ancing is determined by the objectives and timing of investment, the round of ? nancing simply indicates the number of instances of VCPE investments in the ? rm. Thus, for example, turning 1 ? nancing is the ?rst instance of the ? rm acquire VCPE investment, but it carry not be ceaselessly primaeval stage ? nancing. Depending on the ? rm lifecycle and the objectives of investment, expound 1 ? nancing can happen in any of the four ? nancing stages. Similarly, there could be multiple rounds of investment happening in the same stage. In a muchoverional round of livelihood, there may be many investors jointly commit in the company.For example, when there is a co-investment by more than one VCPE investor at the same time, it is considered as a single round of investment. By the same token, when the same investor makes investments in the ? rm at distinct times at incompatible valuations, each investment is considered a separate round of supporting. Funding rounds ar considered to be disparate when there has been a corporeal time gap from the previous round of ? nancing and/or the investment happens at a polar valuation from the previous round of bread and butter. range 1 shows the results from the round wise analysis of VCPE investments.The results indicate that 82 percentage of the nub VCPE investments were in en tremendous 1, i. e. ?rst time VCPE investments in the company. kayoed of the check amount of investment, follow on investments account for only 18 percent. It can be notice that investments decrease sharply with resultant backup rounds. One feasible reason fuck this could be because of the constitution of data most of the investment has happened during the later years of the study period5, indicating that suf? cient time great power not see elapsed for the next round of investment.However, these results indicate the possibility that VCPE investments atomic number 18 happening at a much later stage in the ? rm lifecycle and the ? rm is not in strike of an surplus financial backing round for reaching a critical size that is unavoidable for an initial offering or for ? nding a buyer. This susceptibility also be explained by the grandstanding opening (Gompers, 1996), where VCs argon keen to exit more readyly from their investments. Second, this trend can also indicate that the companies that require standard the ? rst round mogul not impart been able to achieve a strong profuse deed to attract the next round of investment from investors. only studies are pick uped to see to it this pattern in detail. panel I indicates that the number of rounds of reinforcement received by companies in different industries was 1,912 from a issue forth of 1,503 companies. This indicates that the ordinary number of rounds in a company was 1. 27. As can be seen from Table I, a commodious absolute studyity of the ? rms vex received only one round of VCPE investment. This result accompanies the results in throw 1 well, which indicate that 82 percent of the total dishonour 3 1,061. 85 (2. 6%) Round 2 5,394. 11 (14%) VCPE in India 9 Round 4 391. 25 (1%) Round 5 170. 6 (0. 4%) Round 1 2,961. 47 (82%) build 1. Round-wise VCPE investments (in US$mn) during 2004-2008 JIBR 3,1 pains 10 Table I. ascertain of companies for different keep rounds Computer hardware technology and verbal expression monetary services health care IT and ITES Manufacturing no.-? nancial services Others Telecom and media Transportation and logistics Grand total Count of companies for different financial support rounds 1 2 3 4 5 6 7 36 137 110 92 295 214 133 65 93 51 1,226 5 21 30 19 53 25 12 10 15 8 198 1 6 5 6 12 6 5 3 4 3 51 1 1 3 2 3 3 2 1 1 17 1 2 8 1 1 1 1 2 1 3 1 4 2 2 number companies 43 167 151 one hundred twenty 364 250 153 9 112 64 1,503 investments were Round 1 investments. Only 13 percent of companies imbibe obtained two rounds of financial backing, and approximately 5 percent of the total companies that oblige received VCPE investments during the period have obtained more than two rounds. The ratio of companies that have received the second round of accompaniment in different industries is more or less the same as what we saw for Round 1 investments, take out in the ? nancial services category. The phenomenon of some industries macrocosm more successful in getting Round 2 investments could not be cl archean observed in our analysis.In a way, this is a surprise trend. For example, information technology (IT) and information technology-enabled services (ITES) companies imprint 24 percent of the total number of companies that have received financial support, 24 percent of the companies that have received the ? rst round of funding, and 25 percent of the companies that have received more than one round of funding. This indicates that IT and ITES companies, seen as one of the engines of growth in India, have not had high ratioal success than companies in other industries in attracting multiple rounds of funding.The ? nancial services companies constitute 10 percent of the total companies that have received funding, 9 percent of the companies that have r eceived one round of funding, and 15 percent of the companies that have received more than one round of funding. This indicates that ? nancial services companies have a better track demonstrate of getting excess investment rounds. The reasons could be numerous the larger funding requirements created the need for funding to happen in multiple rounds and companies that had obtained the ? st round of funding would have been able to show issue a strong performance track record to attract the incidental rounds of funding. The industry itself was in an upswing in India during the study period and this office have carryd to investor interest in investing in subsequent rounds. It could also be due to the institutional and regulatory features of private equity (PE) investing in India. For example, funding could be through with(p) in multiple rounds because of the procedural issues in foreign investments in certain sectors. supercharge studies are needed to identify the determinants of funding rounds.One would jolly expect that multiple rounds of funding would be observed in more capital intensive industries. Among the ten industry categories, engineering and twirl and manufacturing sectors are really capital and summation intensive. However, it can be seen that the analogy of companies receiving supererogatory rounds of funding in these sectors is not more than the proportion of companies that have received ? rst-round funding. On the contrary, the proportion of companies receiving additional rounds of funding in manufacturing is less than that of their proportion in Round 1 ? ancing. several(prenominal) explanations are possible for this trend, which needs to be substantiated with further research. Companies are receiving VCPE funding at a much later stage in the lifecycle and they do not need additional rounds of funding before providing an exit to the investor. It is possible that, because of their asset intensive nature, they are able to get access to debt funding thereby limiting the possibility of additional rounds of VCPE ? nancing. VCPE in India 11 4. 2 season of incorporation and ? nancing stage It is well known that VC investments happen premature in a ? rms life.It is during the primeval stage that companies have limited misbegottens to raise specie from conventional sources and look to sources like VC for shock the funding requirements. Table II provides the results from our analysis of the interval amid the year of incorporation of the company and the ? nancing stage. The results indicate some enkindle trends. Early stage funding should normally happen inside the ? rst couple of years after the incorporation of the ? rm. But in our analysis, we ? nd that 17 percent of the ? rms have received their early stage funding as much as ten years after they were incorporated.While the highest frequency of early stage funding can be seen in the one- to three-year category, a large proportion of companies get their early stage funding even until the ? fth year from the time of incorporation. This indicates the waver of the VCPE investors in India to make investments in very early stages. A majority of the growth stage investment happens amongst ? ve and eighter from Decatur years from incorporation. However, the second highest percentage of growth stage funding happens after 15 years after incorporation. While growth stage ? nancing during the ? e- to eight-year period seems reasonable (though it is sleek over more than that which is normally associated with growth ? nancing), growth ? nancing happening after 15 years from incorporation needs to be examine in detail. It could either be a question of willingness or readiness. Either the investors are not willing to invest before or the companies are not relieve oneself to receive VCPE funding in their early years. The companies power have explored funding from family, banks, or friends before taking investment from VCPE investors. funding sta ge Early Growth tardy Pre-IPO metre since incorporation (in years) ,1 20 13. 6% ,3 22 9. 3% 7 2. 3% 7. 7% 1-3 51 34. 7% 3-5 26 11. 0% 15 5. 0% 0 0. 0% 3-5 37 25. 2% 5-8 68 28. 8% 25 8. 3% 6 15. 4% 5-8 13 8. 8% 8-10 36 15. 3% 19 6. 3% 3 7. 7% 8-10 1 0. 7% 10-15 31 13. 1% 61 20. 3% 13 33. 3% Total . 10 25 17. 0% . 15 53 22. 5% 173 57. 7% 14 35. 9% 147 236 ccc 39 Table II. repress of VCPE deals for different ? nancing stages vs time since incorporation of investee companies JIBR 3,1 12 analysis of late stage investment deals, as can be expected, show an increase trend with time from incorporation. However, more than one-half of the late stage deals that have been studied are seen in companies more than 15 years after their incorporation.This again re-con? rms the preceding ?ndings that VCPE investors have been more inclined to invest in companies that have a womb-to-tomb track record and operating history, and have a suf? cient size. From the perspective of companies that are rec eiving VCPE funding, such late stage funding, could indicate that these companies might have been part of a larger business group, which provided the ? nancial support in their early years. Further studies need to be through to netherstand the antecedents of ? rms that receive late stage investment.But one of the most compelling observations which attracts present(prenominal) attention is that about 75 percent (541 out of 7226) deals are in companies that are more than ? ve years old. Almost 60 percent (429 out of 722) VCPE deal investments are made in ? rms that are eight years old or more. This supports the earlier inferences that VCPE funds in India are more inclined to invest in ? rms that have a track record of performance. While this investment trend might not be very different from that which is seen in other appear economies such as Brazil (Ribiero and de Carvalho, 2008), it is much more marked in India.Therefore, it is felt that most of the VCPE investments in India are i n the nature of PE investments rather than VC investments, which are typically investments made in early stage companies. 4. 3 Intervals between funding rounds Table III presents average time intervals in months between different rounds of PE funding (for Rounds 1-3)7 across industries. The average time interval across industries between Round 1 and Round 2 funding is 13. 69 months, which is just slightly more than year. The average time interval between Round 2 and Round 3 funding is 10. 1 months, which is less than a year. The median values for the above intervals are 12. 17 and 11. 17 months, respectively. The closeness of the mean to median values indicates that there is no signi? cant skew in the time interval between different funding rounds. get winds 2 and 3 show the diffusion of time intervals between rounds. These indicate that the deals are well distributed in the initial periods, with a slightly higher frequency roughly the mean value, and tapering down in the later p eriods. Since it takes about three to six months from the date of the ? rst signi? ant meeting with the investors to wee-wee an investment, the low time interval between nonparallel Industry Table III. ordinary time interval between in series(p) rounds of VCPE funding (in months) R2-R1 R3-R2 Computer hardware Engineering and construction Financial services Healthcare IT and ITES Manufacturing no(prenominal)-? nancial services Others Telecom and media Transportation and logistics Total 14. 43 17. 13 12. 28 14. 89 15. 64 11. 58 13. 93 8. 46 11. 16 9. 54 13. 69 16. 72 4. 88 7. 44 14. 22 12. 43 10. 14 16. 57 6. 03 15. 23 9. 63 10. 91 VCPE in India 50 45 Number of deals 40 35 30 13 25 20 15 10 5 0 3 3 to 6 6 to 9 9 to 12 12 to 18 18 to 24 24 to 36 ? 36 sequence (months) foreshadow 2. Time between Round 2 and Round 1 investments 14 12 Number of deals 10 8 6 4 2 0 ?3 3 to 6 6 to 9 9 to 12 12 to 18 18 to 24 24 to 36 Duration (months) ? 36 ?nancing rounds indicates that the top manage ment of the company might be continuously devoting their energies in raising capital. This might not be good enough for business, as spending more time on raising ? nancing is possible to affect their attention to business operations. Our results also indicate that in the Indian context the pace of ? nancing increases with time.This result is somewhat surprising as, under normal circumstances, the size of funding increases with every additional round of funding and is expected to meet the needs of the company for a daylong duration even after accounting for the higher specie burn rates due to the increase in company size. Analysis of time intervals for different industry categories indicates that the engineering and construction sector had the largest time interval between the ? rst and second round of funding. Some explanations, which need to be followed with further research, for this trend include being capital intensive.They raise large sums which Figure 3. Time between Rou nd 3 and Round 2 investments JIBR 3,1 attention the companies to sustain the operations for a longer period. They are able to get additional funding from other sources such as debt. Cash ? ows from operations would also contribute towards the ? nancing requirements. However, the time interval between second and third round is the lowest for this sector, which indicates that this could be due to the pre-IPO nature of funding. 14 4. 4 Investment exits Venture exit has been an area where there has been limited research (Gompers and Lerner, 2004).The VCPE investor after a certain period has to exit the investment to recover the same as well as to earn a return on it. The different possible exit routes play a major role in VCPE ? nancing and the presumable availableness of favorable exit opportunities in lesser time is one of the key criterions used by investors while evaluating investment opportunities. Though there are several exit routes for the VCPE funds such as IPO, subsidiary s ale of shares, M, management buy outs, and liquidation. Exit by IPOs and trade sale through M are the more familiar methods of exit in Indian VCPE markets.Of the total 252 exit events that were recorded during the ? ve-year period ending 2008, 84 events were IPOs and the remaining 168 were M. Thus, the ratio of exits of IPOs and M is exactly 0. 5, indicating that an exit by M is twice as likely as that by IPO. However, an analysis of this ratio across different industries provides an evoke picture. The ratio is less than 1 for all but two of the industry categories engineering and construction, and transportation and logistics. Companies in this sector tend to be capital intensive industries with a large asset base and largely dependent on the Indian market.Since companies in this sector are much larger in terms of revenues or assets, it becomes comparative degreely easier to achieve an exit by means of an IPO. For sectors, that are not so asset intensive, M seem to be a common f orm of exit for VCPE investors. Computer-hardware, IT and ITES, and healthcare all traditionally attractive industries for VCPE investments show a strong inclination towards M exit routes with the ratio of IPO-M exits being less than 0. 4 (Figure 4). The choice of exit route is also in? uenced by the state of the capital markets. The ratio of IPO-M exits in each of the ? e years during the study period is shown in Figure 5. Figure 4. Ratio of exits by IPO to M across industries Co En m gi pu ne te er r-h in g ar an dw d ar co e ns tru Fi na ct io nc n ia ls er vi ce s H ea lth ca IT re an d IT M ES an N uf on ac -fi tu na rin ci g al se rv ic es Te O le Tr th co er an m s sp an or d ta m tio ed n ia an d lo gi tic s 1. 6 1. 4 1. 2 1 0. 8 0. 6 0. 4 0. 2 0 VCPE in India 0. 9 0. 8 0. 7 0. 6 0. 5 0. 4 15 0. 3 0. 2 0. 1 0 2004 2005 2006 2007 2008 Figure 5. Ratio of exits by IPO to M during 2004-2008 While the overall ratio of IPO-M exits is 0. 5 for the ? e-year period ending 2008, the ratio varies in line with the state of the capital markets. The ratio ranges from 0. 3 to 0. 6 for all years, except 2006, when it is signi? cantly high (. 0. 8). This can probably be attributed to the ? ourish in the IPO market in India during 2006. This is consistent with the ? nding that IPOs are more likely to occur when equity values are high (Lerner, 1994). In addition to the oddball of exit, the capital markets also in? uence the time taken for an investor to exit. The pattern of variation in an average number of rounds for the two exit methods over the years is shown in Figure 6.It can be noted that there are large variations for those companies that provided exits through IPOs. The number of rounds of VCPE funding before the IPOs are cast down during the years 2006 and 2007, when the capital markets were active. Such variations could not be seen in those cases where the exits were from M. The number of rounds of funding before an M has been gradually increase over the ye ars, indicating that the size needed before an exit from an M has also been increase over the years. But a more interesting inference could be for companies that exit from anM the circumstances in the capital markets do not have a signi? cant effect. On the other hand, if the conditions are favorable, companies tend to make their IPOs in a shorter period to take advantage of the momentum in the capital markets. This is also supported by the fact that the average numbers of funding rounds are nearly equal for both the exit emblems during 2006 and 2007. 3. 5 mediocre number of rounds 3 2. 5 2 IPO 1. 5 Trade sale M 1 0. 5 0 2004 2005 2006 2007 2008 Figure 6. Average number of funding rounds before exit during the ? ve years JIBR 3,1 16 4. 5 Investment durationThe duration of a VCPE investment is de? ned as the interval between the time of investment and exit8. It is generally considered that VCPE funds are not short-term investors, and stay invested in the ? rm between three and ? v e years however, our analysis tells a different story. Table IV provides the investment duration for investments in different ? nancing stages. To make our analysis more accurate, this praxis was done only for those companies for which complete data on both investments and exits were available. A total of 110 transactions in 98 companies were include in this analysis.The main ? nding from Table IV is the overall short-term duration of VCPE investments in India. For 63 percent of the investment transactions, the average investment duration is less than one year. Even in those investments which can be classi? ed as growth stage, 75 percent of the investments have less than two years duration. For late stage investments, the proportion of exits within two years increases to 87 percent. Overall, the average duration of investment stands at just 17 months. In comparison, the investment duration for an IPO exit in the USA and Canada is 4. 7 and 5. 86 years, respectively.The investment du ration for an exit through the acquisition route for the USA and Canada is 5. 17 and 6. 94 years, respectively, (Cumming and MacIntosh, 2001). For VCPE investments, which are generally considered median(a) to long-run investments, the observed duration in India is very low, indicating that most of the investments are late stage or pre-IPO types of investments. While Indian VCPE investors would generally indicate that they are long-term investors, the data corroborates that which many entrepreneurs have endlessly felt that VCPE funds need to be invested in the long term and not focused on quickly exiting from the investment.While these results are interesting, they also suffer from two limitations the try size and the ? ve-year time frame for analysis. Further con? rmatory studies that cover a longer time frame with more deals are needed. 4. 6 Statistical analysis of investment duration and type of exit As a part of this study, statistical analysis was done to determine whether a ny of the variants were able to explain the duration of VCPE investment and the type of exit. For this analysis, Investment duration and type of exit were taken as the dependent varyings. independent uncertains used in the study were industry, ? ancing stage, region, and type of VCPE fund. Bivariate statistical regressions (Table V) indicate the relative in? uence of each independent variable on the dependent variables. As it can be expected, duration of investment can be best explained by ? nancing stage. The high f-ratio and the fi sissy stage Early Growth juvenile Table IV. Duration of VCPE investments Pre-IPO ,1 0 0. 0% 14 48. 3% 35 61. 4% 20 90. 9% Duration of investment (in years) 1-2 2-3 3-4 4-5 2 100. 0% 8 27. 6% 15 26. 3% 2 9. 1% 0 0. 0% 6 20. 7% 6 10. 5% 0 0. 0% 0 0. 0% 1 3. 4% 1 1. 8% 0 0. 0% 0 0. 0% 0 0. 0% 0 0. 0% 0 0. 0% .5 Total 0. 0% 0 0. 0% 0 0. 0% 0 0. 0% 2 29 57 22 R S. no. Dependent variable Independent variable(s) 1 2 3 4 5 6 7 8 Duration of Industry inve stment financial backing stage Region figure of VCPE fund Exit mode Industry Stage Region Type of VCPE fund R2 Adjusted R2 SE of the estimate 0. 318 0. 387 0. 159 0. 278 0. 544 0. 429 0. 221 0. cxv 0. 101 0. 150 0. 025 0. 077 0. 296 0. 184 0. 049 0. 013 0. 007 0. 118 0. 011 0. 066 0. 212 0. 154 0. 014 0. 001 10. 853 10. 157 10. 876 10. 453 0. 423 0. 439 0. 474 0. 477 ANOVA p-value F-ratio (Sig. ) 0. 938 4. 755 0. 696 6. 952 3. 506 6. 093 1. 389 1. one hundred five 0. 498 0. 004 . 557 0. 010 0. 001 0. 001 0. 252 0. 296 VCPE in India 17 Table V. Results from bivariate regression analysis low p-value indicate the signi? cance of the regression. This can be easily explained as those investing in the early stage would remain invested for a longer duration and those investing in late stages would remain invested for a shorter duration. High f-ratio and low p-values are also noted for the bivariate regression that had a type of VCPE fund as the independent variable. In this study, VCPE funds were reason into two domesticated and foreign. The fact that this has an in? ence supports the argument that domestic VCPE funds stay invested for a longer duration as compared to foreign funds. It was also noted that industry and stage of ? nancing have more in? uence on the exit mode as compared to other variables. These results can also be explained. Some industries could be more worthy for exiting with IPOs because of the market bias. Similarly, many of the late stage and pre-IPO investments are made just before the company goes for an IPO. When these investments are being made, the investee company has a candid road use for going for an IPO.Therefore, the exit route in such late stage and pre-IPO investments are more or less clear at the time of the investment itself, unless there is an adverse change in market conditions. We performed a discriminant analysis in SPSS (Table VI) to predict the probable exit route for an investment, tending(p) the independent variable s. Discriminant analysis Dependent variable (Y), i. e. exit method Original Count % Cross-validatedb Count % Predicted group membershipa 1 (IPO) 2 (M) Total 1 (IPO) 2 (M) 1 (IPO) 2 (M) 49 5 87. 5 17. 2 7 24 12. 5 82. 8 56 29 100. 0 100. 0 1 (IPO) 2 (M) 1 (IPO) 2 (M) 5 6 80. 4 20. 7 11 23 19. 6 79. 3 56 29 100. 0 100. 0 Notes a85. 9 percent of real grouped cases right on classi? ed and 80. 0 percent of cross-validated grouped cases correctly classi? ed bcross-validation is done only for those cases in the analysis in cross-validation, each case is classi? ed by the functions derived from all cases other than that case Table VI. Results from the discriminant analysis on exit method classi? cation JIBR 3,1 18 is typically used for the prognostication of categorical or non-metric variable being classi? ed into two or more mutually exclusive categories.The independent variables used in the discriminant analysis were industry, ? nancing stage, region, and type of VCPE fund. The propor tion of cases correctly classi? ed indicates the ef? cacy and relevance of the application of discriminant analysis for predicting the dependent variable, which in this case is the type of exit. Discriminant analysis was done on the investment and exit data for 85 out of 98 companies (for which all necessary details were available). Out of the 85 companies, IPO exits were observed for 56 companies and M for 29 companies. Table VI indicates the results from the discriminant analysis.It can be seen that 49 out of 56 IPO exits and 24 out of 29 M exits were correctly classi? ed, thus passing an error of 12 out of 85 cases. Overall, 85. 9 percent cases are correctly classi? ed. To augment the validity and reliability of the ? ndings, a cross validation was done. In a cross validation, each case is classi? ed using a discriminant function derived from all cases other than the case being classi? ed. The cross validation results indicate that 45 out of 56 IPO exits were correctly classi? ed and 23 out of 29 M exits were correctly classi? ed. Overall, 80 percent of the cases were correctly classi? d. Both these results points towards the good predictive power of the available data in prediction of exit method choice. The results also indicate that it is possible to predict the type of exit based on the information available at the time of making an investment, i. e. industry, ? nancing stage, region of investment, and type of VCPE fund. This could indicate that investors are reasonably clear about the type of exit that they might get from a stipulation investment. While the timing of exit might be uncertain, the type of exit seems more or less evident at the time of investment.More research needs to be done to determine whether the variables identi? ed in this paper are a good predictor for exit type or not, even in other markets. 5. thick The growth and vibrancy in the Indian VCPE industry has attracted global attention. This paper highlights some areas of concern that need to be communicate for the long-term growth in the country. First, there has to be a creation of an ecosystem that encourages early stage investments. It would be such early stage investments that would spur innovation and provide the pipeline for growth and late stage investments.Venture economics data indicate that of the total PE commitments made to India, VC commitments9 accounted for 90 percent during 1990-1999, 55 percent during 2000-2009, and 51 percent during 2005-2009. This indicates that though there has been an overall growth in funds committed to India, the proportion of VC commitments that originally fund early stage investments have been gradually decreasing. In the absence of early stage investments, many PE funds would ? nd it dif? cult to ? nd new opportunities for follow on investments. The result would be a funneling of investments in established companies with increasing valuations.In the long run, the industry would fall apart under the burden of su ch high valuations leading to an exit of investors from India. To prevent this from happening, it is important to ensure that there is adequate early stage investing. Since domestic VCPE investors invest more actively in early stages10, this points to the need for creating a more stronger and active community of domestic VCPE investors in India. Second, the short duration of VCPE investment does not bode well. A recent World Economic Forum report indicates that PE investors have a long-term self-control bias nd 58 percent of the PE investments are exited more than ? ve years after the initial transaction. So-called quick ? ips (i. e. exits within two years of investment by PE funds) account for only 12 percent of deals and have decreased in the last few years (Lerner and Gurung, 2008). Seen from this perspective, most of the VCPE investments in India could come under the category of quick ? ips. This trend, if it continues, would be a cause of real concern. It is expected that VCPE investors would do a lot of hand holding and participate in value-adding activities in their portfolio companies.However, contributing to the investment in such ways would happen only if the investors remain invested for a long term. short investments deny the portfolio companies the opportunity to leverage the management expertise of the VCPE investors. Since the investment duration is also in? uenced by the source of VCPE funds, there is a strong need to promote the domestic VCPE industry in India11. The domestic investors would stay invested for a longer duration and this would give more opportunities to the investor to add value in the portfolio companies.Third, the time intervals between successive funding rounds should increase. Frequently, approaching the investors means that the top management attention gets diverted from the business operations. It would be bene? cial if the entrepreneurs and companies raise capital in such a way that the portfolio company can sustain the operations for at least two years. While they might feel that raising a large round would deprive them the bene? ts of valuation increases if funding is raised in multiple rounds, it would de? nitely second to keep the transaction costs lower.The issues of valuation increases can be addressed by incorporating suitable incentive structures in the shareholders agreement. The investors too should support the idea of a larger funding round for the companies and engage in co-investing with other VCPE investors if required. Given the exploratory nature of this study, further research and con? rmatory studies are needed to corroborate the ? ndings of this paper. It is felt that many of the results in this paper are suf? ciently interesting to warrant further studies. Notes 1.Based on Subhash (2006) and PricewaterhouseCoopers world(a) occult Equity get overs 2004, 2005, 2006, 2007, and 2008. 2. Investment data from the PricewaterhouseCoopers orbicular insular Equity Reports might not match with that of the funds committed data from think economics as we feel that many investments might have been made outside of a evening gown VCPE fund structure. In addition, several funds locally set up in India might not have been captured in the venture economics database. However, both the reports indicate the strong growth in funds committed to various VCPE funds and substantial investments made in companies. . Venture Intelligence can be accessed at www. ventureintelligence. in 4. Asian Venture bully Journal database can be accessed at www. avcj. com 5. Out of the 1,503 companies that received funding from VCPE investors, 866 companies, i. e. 58 percent of the companies received their funding during the last two years of the study period. 6. Information on time of incorporation was readily available only for 722 out of the 1,503 companies. 7. Since there are very few companies that have received more than three rounds of ? nancing, Round 4 and above have not been inclu ded for this analysis.VCPE in India 19 JIBR 3,1 20 8. stringently speaking, it would dif? cult to determine when the investor factually exited from the investment, either partially or completely. One could ? nd that information by studying the one-year reports as well as crease exchange ? lings of the company, which was not done in this study. Exit in this paper is meant to be understood as the time of situation of an exit event, which may or may not be the time of actual exit. 9. A distinction can be made between VC and PE commitments. VC commitments are generally targeted at the early stage and growth stage investment opportunities.PE commitments are mainly targeted at the late stage opportunities. Average investment in deals by PE funds is usually larger than those made by VC funds. 10. 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Vinay Kumar, A. and Kaura, M. N. (2003), Venture capitalists screening criteria, Vikalpa, Vol. 28 No. 2, pp. 49-59. About the authorsThillai Rajan Annamalai is an Associate Professor in the Department of Management Studies at IIT Madras. His research interest includes VC, PE, infrastructure, and corporate ? nance. Thillai Rajan Annamalai is the corresponding author and can be contacted at emailprotected ac. in Ash ish Deshmukh was an MBA student at the Department of Management Studies at IIT Madras. To purchase reprints of this article please e-mail emailprotected com Or visit our web site for further details www. emeraldinsight. com/reprints VCPE in India 21