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               Securities and Exchange Board of India

accessing the capital market.  This will also protect smaller investors. A study of US markets during the period 1972 through 1992 showed that venture-backed IPOs earned 44.6% over a typical five year holding period after listing compared with 22.5% for non-venture backed IPOs.  The success of venture capital is partly reflected by these numbers since 80% of firms that receive venture capital are sold to acquiring companies rather than coming out with IPOs, in which the return multiple vis-à-vis non-venture funded companies is much higher. This potential can also be seen in sales growth figures for the U.S. where, from 1992 to 1998, venture capital funded companies sales have grown by 66.5% per annum on average versus 5% for Fortune 500 firms. The export growth by venture funded companies was 165%.  All the top 10 sectors measured by asset and sales growth in USA were technology related.  

2.7Thus, venture capital is valuable not just because it makes risk capital available at the early stages of a project but also because of the expertise of venture capitalist that leads to superior product development.  The big focus of venture capital worldwide is,  technology.  Thus, in 1999, around $30 bn of venture capital has been invested in the U.S. of which technology firms reportedly got around 75%. Besides this huge supply from organised venture funds there is an even larger pool of “angel” funds provided by private investors.  In 1999, it was expected that angel investment would be of the order of $90 bn, thus making the total “at-risk” investment in  high technology ventures in a single year of $120 bn.   By contrast, in India, cumulative disbursements to date are not more than $500m, of which technology firms have received only 36%.

2.8The other successful experience is that of Taiwan:  Hsinchu Science-based Industrial Park is the showpiece of Taiwan’s success. Forty percent of the firms established in this government promoted park, which currently accommodate 3,000 expatriates, were begun by entrepreneurs from the United States.  The revenue of firms located at Hsinchu Park alone was $14 billion in 1998.  Facilities at Hsinchu include English language teaching for the children of its expatriate entrepreneurs.  The Hsinchu experiment has benefited from the generally high quality of education in Taiwan, whose institutes produce 50,000 engineers annually.  Taiwan has 74 technical schools, 36 colleges and 24 universities, two of which are located near Hsinchu Park.  The venture capital environment has also been a favorable factor.  There are 110 venture capital firms in Taiwan, including 38 begun in 1998.  By the end of 1997, these firms had invested $1.32 billion in 1,839 ventures, mostly  in high technology.

2.9Taiwan’s government has been particularly successful in promoting its hardware industry through tax incentives, low tariff barriers, credit at cheap rates, good infrastructure facilities and  establishment of research institutes.  The Industrial Research Institute, owned by the government,  started with semiconductor technology purchased from RCA Records.  The technology subsequently

Report of K B Chandrasekhar Committee on Venture Capital12

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