The venture capital and private equity industry

journal of Indian Business Research Emerald Article stake crownwork and private batchdor in India an psycho digest of enthronisations and clog ups Thillai Rajan Annamalai, Ashish Deshmukh Article entropy To cite this document Thillai Rajan Annamalai, Ashish Deshmukh, (2011), impale gravid and private equity in India an analysis of investments and die outs, Journal of Indian Business Research, Vol. 3 Iss 1 pp. 6 21 Permanent link to this document http//dx. doi. org/10. 1108/17554191111112442 Downloaded on 24-09-2012References This document contains references to 25 other documents To re-create this document emailprotected com This document has been downloaded 365 quantifys since 2011. * Users who downloaded this Article also downloaded * Vedran Vuk, (2008),Taking advantage of disaster misrepresentation of ho utilize shortage for political gain, International Journal of Social economics, Vol. 35 Iss 8 pp. 603 614 http//dx. doi. org/10. 1108/03068290810889224 Doru Tsagane a, (2011),Tension reduction by military power equalization the USA-USSR case, 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-establish system for industry using info and communication technologies, Kybernetes, Vol. 38 Iss 3 pp. 533 541 http//dx. doi. org/10. 1108/03684920910944254 Access to this document was granted through an Emerald subscription provided by For Authors If you would uni row to write for this, or any other Emerald realityation, thence please use our Emerald for Authors service.Information ab pop out how to choose which publication to write for and submission guidelines ar avail able-bodied for all(prenominal). 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The current issue and full text archive of this journal is available at www. emeraldinsight. com/1755-4195. htm JIBR 3,1 Venture capital and private equity in India an analysis of investments and sees 6 Thillai Rajan Annamalai and Ashish Deshmukh Department of Management Studies, Indian bestow of Technology Madras, Chennai, India AbstractPurpose The impale capital and private equity (VCPE) industry in India has grown signi? cantly in recent years. During ? ve-year stream 2004-2008, the industry ontogenesis rate in India was the fastest globally and it rose to occupy the come up three slot worldwide in terms of quantum of investments. However, schoolman research on the Indian VCPE industry has been limited. This paper seeks to ? ll the gap in research on the recent trends in the Indian VCPE industry. Design/methodology/ undertake Studies on the VCPE proceedings take on traditionally cogitate on iodin of the components of the investment life bout, i. e. nvestments, monitoring, or live on. This ascertain is based on analyzing the investment life cycle in its entirety, from the date of investment by the VCPE ancestry till the time of outcome. The analysis was based on a total of 1,912 VCPE transactions involving 1,503 ? rms during the years 2004-2008. Findings virtually VCPE investments were in late issue ? nancing and took place many years after the internalization of the investee ? rm. The industry was also characterized by th e short era of the investments. The compositors case of exit was well predicted by the type of industry, ? nancing stage, region of investment, and type of VCPE fund.Originality/ honor This paper highlights some of the key beas to ensure sustainable result of the industry. Early stage championship opportunities should be increased to ensure that on that point is a inexpugnable pipeline of investment opportunities for late stage investors. VCPE investments should be seen as long-term investments and not as quick ? ips. To achieve this, it is important to confine a strong domestic VCPE industry which can stay invested in the portfolio play along for a bimestrial term. Keywords Venture capital, Equity capital, India, investment moneys, Financing Paper type Research paper . Growth of the Indian VCPE industry Over the run low few years, India has become one of the atomic number 82 destinations for venture 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 growth in the industry was primary(prenominal)ly after the economic reforms in 1991. Prior to that, close of the VCPE musical accompaniment was from public sector ? nancial institutions, and was characterized by low levels of investment activity. In recent years, VCPE commitments and investments in India start out grown at a rapid pace.Venture economics information debate that during the period 1990-1999, Indias ranking was 25th out of 64 and various VCPE finances rig outd $945. 9 million for investments in India however, during the bordering decade, 2000-2009, Indias ranking rose to 13th out of 90 countries and the cash in hand raised $16,682. 5 million for investments in India. Journal of Indian Business Research Vol. 3 No. 1, 2011 pp. 6-21 q Emerald Group Publishing Limited 1755-4195 DOI 10. 1108/17554191111112442 The authors would like to gratefully acknowledge the ? nancial support p rovided by the Indian Council of Social Sciences Research and IIT Madras for this research.They would also like to acknowledge the support of M. B. Raghupathy and V. Vasupradha for this research. This represents a growth of 1,664 pct over the previous decade. The trend is even more encouraging for the most recent ? ve-year period 2005-2009, during which Indias ranking was 10th out of 77 countries, and various funds raised $15,073. 6 million for VCPE investments in India. Funds raised during 2005-2009, represented a growth rate of 837 portion as comp ard to funds raised over the previous ? ve-year period 2000-2004. The growth rate in investments made by various VCPE funds has been equally strong.During the ? ve-year period 2004-2008, the industry growth rate in India was the fastest globally and it rose to occupy the number three slot worldwide in terms of quantum of investments1. The join invested by VCPE funds grew from US$ 1. 8 billion in 2004 to US$ 22 billion in 2007 ahead tapering off to US$ 8. 1 billion in 20082. During the ? ve-year period death 2008, VCPE investments in India grew from 0. 4 part of GDP in 2004 to more than 1. 5 portion of GDP in 2008 (Annamalai and Deshmukh, 2009). The rest of the paper is structured as follows prick 2 delegates the objective of the paper.Section 3 provides lucubrate on the entropy set used for analysis and the sources of data. Section 4, which covers the results and discussion, is divided into sextuplet sub-sections. The sub-sections argon in the pursuit order round wise analysis of investments, time of incorpo coincidencen and ? nancing stage, intervals amongst supporting rounds, investment exits, age of investment, and a statistical analysis of investment era and type of exit. Section 5 provides a summary of the paper. 2. Objective of the paper Research on VCPE has not been in tune with the growth seen in the industry.Past research on the Indian VCPE industry can be broadly classi? ed into the foll owing 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 also include 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 can be considered as case studies of VCPE investments (Kulkarni and Prusty, 2007).The objectives of this paper are as follows ? rst, research that has focused on the recent growth phase of the VCPE industry in India has been limited. Most of the papers that arrive at studied the Indian industry were either before the growth phase (pre-2004) or did not cover the growth phase in full, starting from the onset of growth in 2004 until the slowdown in 2008, caused by the global ? nancial crisis. This paper is an attempt to comely the gap in research on the recent trends in the Indian VCPE industry. Second, there have been real limited studies that founted at the lifecycle of investments, i. . from the time of investment in the company until their exit from the investment. There have been several studies that have looked at areas related to investments such as investment decision making, structure of investments, and valuation. Similarly, there have been studies that have looked at topics related to venture exits. However, there have been limited studies that looked at the entire investment life cycle. The main contribution of this paper is to look at the investment lifecycle in its entirety.Third, this paper aims to highlight some of the littleer known features of the Indian VCPE industry such as the characteristics of the investee ? rm at the time of VCPE investment, the duration of VCPE investments in the ? rm, and the timing and mode of exit by the investors. The objective of this paper is to provide an holistic understanding of the Indian VCPE in dustry to enable the creation of a policy environment to sustain the growth of the industry. VCPE in India 7 JIBR 3,1 8 3. Data set used and sources This study uses VCPE investment transaction data during the years 2004-2008.The choice for the period of analysis was driven by two considerations. First, it was during this period that the industry witnessed signi? cant growth and India emerged as one of the leading destinations for VCPE investments. Therefore, a detailed study of this industry growth would be of general research interest. Second, the choice of period was also governed by practical considerations. Data on VCPE investments in India before 2004 were not available in a form that can be used for a research study. Therefore, it was decided to begin the starting period of the study at year 2004, the year from which we had access to data.It was felt that a ? ve-year study of transactions would be a foretellable time frame to overcome the one-year ? uctuations. This ? ve-y ear period also coincided with a full ? nancial cycle in the global ? nancial marts, a period marked by outstanding growth and equally dramatic fall. The data for the study were obtained from ternary sources. To start with, deal data on the various investments and exits were obtained from two database sources Venture Intelligence India3 and Asian Venture Capital Journal4 database. The data from both these databases were combined to form a comprehensive data set.The data set was then suitably checked for data repetition and duplicate data points were removed ? rst. Second, whenever there was a difference in the information given for the same deal, the correctness and accuracy was checked by independent veri? cation from other sources, such as newspaper reports and company web sites. Information that was not available in these databases was then separately sourced from the web sites of the independent companies. Admittedly, with the lack of a strong database on Indian investments, d eveloping such a data set involved a lot of effort.The comprehensive data set that was developed provided various details on the VCPE investments and exits that happened in India during 2004-2008. It consisted of a total 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 remaining 98 ? rms had both VCPE investment and exit transactions. To facilitate a more detailed analysis, the investments were classi? ed into ten industry categories and four ? ancing stages based on the lifecycle stage of the investee ? rm and the objectives of the investment. Exits were classi? ed into two categories, namely initial public offer (IPO) and merger and acquisition (M) or trade cut-rate sale. 4. Results and discussion 4. 1 roundabout-wise analysis of investments Firms seeking to raise VCPE investments normally receive the investment in multiple rounds (Sahlman, 1990) earlier works have provided several explanations for this trend. Gompers (1995) indicates that the staging of capital infusions allows venture capitalists to gather information and monitor the progress of ? ms, while retaining the option to periodically abandon projects. Admati and P? eiderer (1994) indicate that such an option to abandon is essential because an entrepreneur will most never quit a failing project as long as others are providing capital and the threat to abandon creates incentives for the entrepreneur to maximize determine and insure goals. Neher (1999) indicates that multiple rounds of ? nancing overcome the potential agency con? icts between the entrepreneur and investor as previous rounds create the collateral to support the later rounds. season the stage 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, Round 1 ? nancing is the ?rst instance of the ? rm getting VCPE investment, but it fatality not be always azoic stage ? nancing. Depending on the ? rm lifecycle and the objectives of investment, Round 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 particular round of financial backing, there may be many investors jointly investment 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 claims investments in the ? rm at varied times at divers(prenominal) valuations, each investment is considered a separate round of sustenance. Funding rounds are considered to be different when there has been a substantial time gap from the previous round of ? nancing and/or the investment happens at a different valuation fr om the previous round of funding. general anatomy 1 shows the results from the round wise analysis of VCPE investments.The results indicate that 82 percent of the total VCPE investments were in Round 1, i. e. ?rst time VCPE investments in the company. Out of the total amount of investment, follow on investments account for only 18 percent. It can be observed that investments decrease sharply with subsequent funding rounds. One practical reason behind this could be because of the nature of data most of the investment has happened during the later years of the study period5, indicating that suf? cient time might not have elapsed for the next round of investment.However, these results indicate the possibility that VCPE investments are happening at a much later stage in the ? rm lifecycle and the ? rm is not in take away of an additional funding round for reaching a critical size that is needed for an IPO or for ? nding a buyer. This might also be explained by the grandstanding sur mise (Gompers, 1996), where VCs are keen to exit more quickly from their investments. Second, this trend can also indicate that the companies that have received the ? rst round might not have been able to achieve a strong enough performance to attract the next round of investment from investors.Further studies are needed to understand this pattern in detail. confuse I indicates that the number of rounds of funding received by companies in different industries was 1,912 from a total of 1,503 companies. This indicates that the fairish number of rounds in a company was 1. 27. As can be seen from Table I, a large majority of the ? rms have received only one round of VCPE investment. This result accompanies the results in traffic pattern 1 well, which indicate that 82 percent of the total Round 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%) Figure 1. Round-wise VCPE investments (in US$mn) during 2004-2008 JIBR 3,1 Industry 10 Table I. deliberate of companies for different funding rounds Computer hardware Engineering and construction monetary services Healthcare IT and ITES Manu pointuring Non-? nancial services Others Telecom and media Transportation and logistics Grand total regard of companies for different funding 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 advert companies 43 167 151 120 364 250 153 9 112 64 1,503 investments were Round 1 investments. Only 13 percent of companies have obtained two rounds of funding, and approximately 5 percent of the total companies that have received VCPE investments during the period have obtained more than two rounds. The symmetricalness of companies that have received the hour round of funding in different industries is more or less the same as what we saw for Round 1 investments, except in the ? nancial services category. The phenomenon of some industries being more winning in getting Round 2 investments could not be cl proto(prenominal) observed in our analysis.In a way, this is a surprising trend. For example, information technology (IT) and information technology-enabled services (ITES) companies constitute 24 percent of the total number of companies that have received funding, 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 higher proportional 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 received 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 record of getting additional 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 showcase a strong performance track record to attract the subsequent rounds of funding. The industry itself was in an upswing in India during the study period and this might have contributed 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 done in multiple rounds because of the procedural issues in foreign investments in certain sectors. Further studies are needed to identify the determinants of funding rounds.One would more or less expect that multiple rounds of funding would be observed in more capital intensive industri es. Among the ten industry categories, engineering and construction and manufacturing sectors are very capital and asset intensive. However, it can be seen that the proportion of companies receiving additional 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 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 condemnation of incorporation an d ? nancing stage It is well known that VC investments happen proterozoic in a ? rms life.It is during the early stage that companies have limited means to raise money from conventional sources and look to sources like VC for meeting the funding requirements. Table II provides the results from our analysis of the interval between the year of incorporation of the company and the ? nancing stage. The results indicate some interesting trends. Early stage funding should normally happen within 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 disinclination of the VCPE investors in India to make investments in very early stages. A majority of the growth stage investment happens between ? ve and eight 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 still more than that which is normally associated with growth ? nancing), growth ? nancing happening after 15 years from incorporation needs to be studied in detail. It could either be a question of willingness or readiness. Either the investors are not willing to invest earlier or the companies are not ready to receive VCPE funding in their early years. The companies might have explored funding from family, banks, or friends before taking investment from VCPE investors. Financing stage Early Growth advanced Pre-IPO Time 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% 147 236 300 39 Table II. Number 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 increasing trend with time from incorporation. However, more than 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 earlier ?ndings that VCPE investors have been more inclined to invest in companies that have a eternal track record and operating history, and have a suf? cient size. From the perspective of companies that are receiving 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 done to understand the antecedents of ? rms that receive late stage investment.But one of the most compelling observations which attracts immediate 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 demonstrations 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 emerging 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 in 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 skewed in the time interval between different funding rounds. Figures 2 and 3 show the distribution of time intervals between rounds. These indicate that the deals are well distributed in the initial periods, with a slightly higher frequency around the mean value, and tapering down in the later periods. Since it takes about three to six months from the date of the ? rst signi? ant meeting with the investors to realize an investment, the low time interval between successive Industry T able III. Average time interval between successive rounds of VCPE funding (in months) R2-R1 R3-R2 Computer hardware Engineering and construction Financial services Healthcare IT and ITES Manufacturing Non-? 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 Duration (months) Figure 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 management of the company might be continuously devoting their energies in heave capital. This might not be in effect(p) for business, as spending more time on raising ? nancing is apparent to affect their attention to b usiness trading 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 longer duration even after accounting for the higher cash 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 Round 3 and Round 2 investments JIBR 3,1 help 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 likely availability 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, secondary sale of shares, M, management buy outs, and liquidation. Exit by IPOs and trade sale through M are the more prevalent methods of exit in Indian VCPE markets.Of the total 252 exit events that were recorded during the ? ve-year per iod 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 interesting 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 form 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 bei ng 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 type 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 lower 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 step by step increasing over the years, indicating that the size needed before an exit from an M has also been increasing over the years. But a more interesting inference could be for companies that exit from anM the circumstances in the capital markets do not h ave 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 types during 2006 and 2007. 3. 5 Average 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 principally considered that VCPE funds are not short-term investors, and stay invested in the ? rm between three and ? ve 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 turn was done only for those companies fo r which complete data on both investments and exits were available. A total of 110 transactions in 98 companies were included 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. pull down 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 duration 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 medium to long-term invest ments, 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 always 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 sample 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 any of the changeables 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 variables. Independent variables used in the s tudy were industry, ? ancing stage, region, and type of VCPE fund. Bivariate 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 Financing stage Early Growth Late 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 investment Financing stage portion Type 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. 115 0. 101 0. cl 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. 105 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 categorized into two domestic 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 suited 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 clear road present 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, given the independent variables. 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 original grouped cases correctly 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 anticipation 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 proportion 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 comp anies (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 leaving an hallucination 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 po ssible 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 given investment. While the timing of exit might be uncertain, the type of exit seems more or less ostensible 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. Summary The growth and vibrancy in the Indian VCPE industry has attracted global attention. This paper highlights some areas of mend that need to be addressed 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 stag e 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 primarily 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 such 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 s tronger 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 ownership 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-term 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 help 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 Global occult Equity Reports 2004, 2005, 2006, 2007, and 2008. 2. Investment data from the PricewaterhouseCoopers Global Private Equity Reports might not match with that of the funds committed data from venture economics as we feel that many investments might have been made outside of a formal 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 actual investments made in companies. . Venture Intelligence can be accessed at www. ventureintelligence. in 4. Asian Venture Capital 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 included for this analysis.VCPE in India 19 JIBR 3,1 20 8. stringently speaking, it would dif? cult to determine when the investor actually exited from the investment, either partially or completely. One could ? nd that information by studying the annual reports as well as stock exchange ? lings of the compan y, which was not done in this study. Exit in this paper is meant to be understood as the time of occurrence 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. 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(2005), Indian VCs involvement with investee ? rms an empirical analysis of board composition, expectations and contribution, ICFAI Journal of Applied Finance, July, pp. 28-39. 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 Ashish 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