Indian start-up firms fail to attract venture capital

Mumbai, Jan 7: Innovative early stage start up firms in India arelagging behind in gathering investment from venture funds as comparedto their counterparts in other countries, with figures indicating thatIndia accounts for a dismal 12 per cent of the venture capital in theearly-stage innovative start up firms as compared to 29 per cent inEuropean Union, 41 per cent in China and 50 per cent in Israel,according to a study conducted by TiE Stanford.

The study was conducted by Dr Rafiq Dossani, Senior ResearchScholar, Stanford University and Asawari Desai, Director TiE Global.

It was made public during the TiE Entrepreneurial Summit 2006, held recently in Mumbai.

A number of measures have been suggested by the study to overcomethis hurdle, some of which includes removal of 25 per cent limit oncorpus investible in a single firm by DVCF (Domestic Ventures CapitalFund) and increasing the tenure of convertible securities of listedcompanies beyond 18 months.

''The motive of the study was the shortage of capital forearly-stage ideas which is leading to dearth of early stage investmentsin India.

This could have a negative ripple effect on the quality of latestage opportunities in later years. The study was based on interactionwith over 175 capital providers, firms, regulators and policymakersacross major geographies including US, UK and Singapore.'' Mr Desaisaid.

The other highlights of the study includes the best practicesfollowed by different countries for encouraging early stageinvestments, reviewing the government policies in these countries andvarious models adopted for public private partnership to study how seedcapital is generated from Government sources.

While the flow of risk capital has increased substantially in Indiasince 2000, it was found in the study that 90 per cent of the money isinvested in late stage firms. Venture capital is invested to developnew products or services as compared to private equity which invests inexisting product or services.

To overcome this low rate, the report has recommended removal of25 per cent limit on corpus investible in a single firm by DVCF(Domestic Ventures Capital Fund) as also the removal of 33 per centlimit on investment in listed securities via primary issue and replaceit with secondary market purchase.

TiE has also recommended increasing the tenure of convertiblesecurities of listed companies beyond 18 months to negotiated period ofaround 5 years, as was recently allowed for portfolio investors.

TiE along with Stanford University and the sponsor organisationswill also work with the major regulatory organisations including theReserve Bank of India (RBI) and Securities and Exchange Board of India(SEBI) to review the recommendations.

The final report will be presented to the Government which willconsider the feasibility of it's implementation during the forthcomingBudget session.

UNI
>