Agarwal, Agarwal & Solojentsev, Venture Finance Model for HR Capacity....

381

FINANCE INDIA
Indian Institute of Finance
Vol. XXVII No. 2, June 2013
Pages381-408

Venture Finance Model

for HR Capacity Building in
Global Dis-equilibrium
AMAN AGARWAL*
SAURABH AGARWAL**
EVGENY DMITRIEVICH SOLOJENTSEV***

Abstract
Venture Finance and Entrepreneurship have provided the invisible
levers controlling the growth of new innovations in the world economy.
The article tries to trace the history of growth in venture finance in US,
UK, Europe, Africa, Asia and India. The structural differences between
Informal, Corporate and Institutional venture finance has also been
highlighted. Venture financing has also boosted the growth financial
engineering and financial markets. A HR capacity building model has
been proposed for the Pre and Post Investment phase of a new venture.
For analysing the aggregate effect on the economy of the factors
outlined in the model an analogue with the Keynesian multiplier has
been drawn. The paper graphically depicts the micro and the macro
perspective of HR augmentation by the Informal, Corporate and
Institutional form of venture capital financing. The evolution spiral
correlating with human resource capacity building adds to the current
understanding of employment generation by a new venture.

I. Introduction
CHANKAYA (350-283 BCE) A PROFESSOR at Takshashila University
on being thrown out by the Nanda King ventures in to make a boy wandering
in the streets the first Maurayan Emperor Chandragupta. Chandragupta
Maurya (340 BC - 298 BC) reign is remembered for defeating Alexanders
Macedonian Satrapies, Nanda Empire and Seleucus and for unifying India.
The period of Mauryan Empire (322 BC - 185 BC) is regarded as the Golden
Age in Indian History with trading done in Silver Panas. Taksha, an ancient
Indian king ventured into creating a centre of advanced learning called
Takshashila (5th century BC) for teaching of Vedas and advanced knowledge
* Vice-Chairman & Professor of Finance, Indian Institute of Finance, 45 A, Knowledge
Park III, Greater Noida, Uttar Pradesh 201308, INDIA
** Vice-Chairman, Indian Institute of Finance, PO Box 8486, Ashok Vihar II, Delhi
110052, INDIA
*** Professor, Russian Academy of Science, Institute of Problems of Mechanical
Engineering, Bolshoi pr., 61. V.O., 199178, St.Petersburg, RUSSIA

Submitted August 2009;Accepted May 2013

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382 Finance India

in eighteen arts including archery, hunting, elephant lore, law, medicine

and military science. The Nalanda University (1197BC-527 BC) was the first
university to be setup in the world housed over 10,000 students and over
2,000 teachers on the campus. The Nalanda University attracted students
and scholars from all across the globe in a period when global information
flow and transportation was negligible. The idea of Pandit Madan Mohan
Malaviya to set up a Hindu University which will spread oriental learning
and theology contributed to the development of the prestigious Banaras
Hindu University (1915), a centre of excellence even today. Kashi Naresh
and Sri Rameshwar Singh Bahadur, Maharaja of Darbhanga funded this
venture. In agriculture the share cropping institution (in which input costs
and output revenues are shared by cultivator and land owner) of land tenancy
lead to development of entrepreneurship in Indian farmers. Share cropping
form of land tenancy promoted farming in a number of non conventional
items including tobacco. Most of the MBAs offered do not focus on a number
of financial issues which have attained vitality post 1985 with organization
failures due to poor management and understanding of Finance. There exists
an over-emphasis on other streams of management which were on the peaks
of organizational success in the 1950 to 1980s leading them to create general
MBAs with specialization in only one semester having two to four papers in
specific management discipline. Indian Institute of Finance recognising this
need pioneered business finance education in India in 1987.
Intel, Cisco Systems, Microsoft, Oracle, Amazon.com and Yahoo have all
shown the significance of venture capital in promoting growth and
contributing to society. The major hindrance for growth oriented
entrepreneurial ventures was lack of adequate finance. Venture finance
provided the necessary support to tap competence, experience and networks
necessary for an entrepreneurial venture. Agarwal (1976, 1988); Murray (1995);
Mason (1996); Wright (1998); Landstrom (1998); Shepherd (2000); Cumming
(2003);, Maula (2005); Solojentsev (2006); Zahara (2006) and have all
contributed significantly in the better understanding of the concept and practice
of venture capital across a modern complex resource inter-locked globe. The
current research extends their work to understand the positive externality
created by venture finance in Human Resource (HR) capacity building.
1.1 Venture Capital
Venture capital is the investment made by an institution, firm or wealthy
individual in business ideas which have the potential to show meteoric rise
and become dominant players in the world market (see Table I). Financing of
such a venture may be in the form of equity or equity linked investments,
management buy-outs, replacement capital and turnarounds. The return in
a venture capital investment is empirically found to be in the form of capital
gains by way of sale rather than dividend income. The three generally
recognised submarkets of venture finance include institutional venture capital,
corporate venture capital and informal venture capital. Institutional venture
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Agarwal, Agarwal & Solojentsev, Venture Finance Model for HR Capacity.... 383

Table I
Genesis of Select few Key Venture Finance Projects
Year Venture Venture Finance Country
Provider/Contributor
527 BC Nalanda University (527BC to 1197) Kumaragupta INDIA
518 BC Takshashila King Taksha INDIA
350 BC Chandragupta Mauryan Empire (350- Chankaya (Kautilya) INDIA
283 BC)
1492 Christopher Columbus expedition Isabella, Queen of Spain SPAIN
(Colonization)
1869 Alexandra Cotton Mill Jamsetji TATA INDIA
1906 Xerox Haloid Corporation US
1908 General Motors DuPont (VF in 1920) US
1915 Banaras Hindu University (Oriental Kashi Naresh & RS Bahadur, INDIA
learning and Theology) Maharaja of Darbhanga
1919 Yarn and Jute Mill Ramnath Goenka INDIA
1924 IBM (Punched Card) TMC (1896), CSC (1891) & US
ITRC (1900) merged
1926 Bajaj motors (Motor Vehicles) Seth Bachhraj INDIA
1938 Eastern Airlines and Douglas Airlines Laurance Rockerfeller
funded Venrock US
1946 Amul Gujarat Co-operative Milk INDIA
Marketing Federation Ltd.
1950 Share cropping farming institution Landlords and farmers INDIA
(Tobacco)
1957 Digital Equipment Corp. (now HP) Georges Doriot, Ralph US
Flanders and Karl
Compton/ ARDC
1959 Fairchild Semiconductor (Practical Laurance Rockefeller US
integrated circuit) funded Venrock
1959 Lijjat Papad Shri Mahila Griha Udyod INDIA
1960 Florida Foods Corporation (Nutritional J.H. Whitney & Company US
one minute juice)
1962 Reliance Commercial Corp. Dirubhai Ambani INDIA
1968 Intel (X86 Microprocessors) Robert Noyce & Gordon Moore U S
1977 Oracle (Database software) Larry Ellison, Bob Miner US
& Ed Oates
1978 Microsoft, DOS (Disk Operating System) Bill Gates & Paul Allen US
1978 BIOCON Biocon Biochemical Ltd. INDIA
(Ireland) & Kiran
Mazumdar Shaw
1981 Infosys Sudha Murthy INDIA
1984 CISCO (Router) Len Bosack & Sandy Lerner U S
1987 Business Finance Education in India Indian Institute of Finance INDIA
1987 3i Group Bank of England UK
1989 VLCC Vandana Luthur & family INDIA
1992 MASTEK ICICI & UTI promoted TDICI INDIA
1994 Amazon.com (Online Book store) Jeffrey P. Bezos US
1994 Yahoo (Search Engine) Sequoia Capital US
1996 Hotmail (Free Webmail service) Draper Fisher Jurvetson US
1997 Kshema Technologies (Customised Anant Koppar INDIA
IT Services)
Note: The current research traces the genesis of Venture Finance in India to fifty century
BCE Classical Venture Finance, which can be traced to development of Nalanda
University, Takshashila, Mauryan Empire and in recent times to Biocon and VLCC.
Corporate Venture Finance can be traced to emergence of Alexandra Cotton Mill,
Benaras Hindu University, Yarn and Jute Mill of Goenka, Lijjat Papad, Infosys
and Kshema Technologies. Institutional Venture finance started in late 1980s with
the development of TDICI in 1988.
Source: Self Formulated from Historical Archives, Encyclopaedias & Wikipedia

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384 Finance India

capital was first defined by Wright and Robbie (1998) as the finance provided
by professional investors for long-term in unquoted and risky firms. Mason
and Harrison (1999) further explained that the professional investors could
include pension funds, insurance companies, banks and other financial
institutions and the firms could develop into publicly traded companies,
captive subsidiaries of large banks or independent limited partnerships.
Bygrave and Timmons (1992) distinguished between classical and merchant
venture capital funds. In classical venture capital, finance was provided by
wealthy individuals and families and who provided it in the early stage of
growth and remained actively as a part of the venture. Merchant venture
capital fund is a form of institutional venture finance which focuses on
financial engineering to invest for short term investment horizon. Hence,
corporate venture finance may take place by investing in either externally
managed or internally managed firms. According to McNally (1994) internal
corporate venture may be in the form of spin offs from the company which
are managed in-house and external corporate venture may take place by
investment in semi-autonomous and autonomous firms which are
independently managed. William Wetzel (1983) first defined informal venture
capital as the finance provided by business angels for young entrepreneurial
ventures. Lerner (2000) later defined business angels as wealthy individual
who invest in innovative ventures.
The genesis of modern venture capital in existing literature is traced to
the activity of Spanish Queen Isabella of Spain who sponsored the voyage of
Christopher Columbus. DuPont (1919) is regarded as the first modern day
venture. DuPont purchased thirty eight percent of equity interest in General
Motors. IBM was established in 1924 by a group of wealthy individuals by
merging a few smaller companies. Ralph Flanders, president of Federal
Reserve Bank of Boston proposed creation of fiduciary funds which would
enable institutional investors to invest five percent of their assets in equity of
new ventures. Xerox Corporation is an excellent example of corporate venture
finance whereby Haloid Corporation invested in the technology developed
by Chester Carlson and Battelle Memorial Institute. The first venture capital
firm in California Draper, Gaither and Anderson was founded in 1958 and
led to development of formal venture capital firm in Silicon Valley and San
Francisco (Florida and Kenney, 1988).
1.2 Scenario for Venture Capital in United States, Europe, Africa, Asia and India
1.2.1 Growth of Venture Capital in United States
In 1911 International Business Machines (IBM) was started by a group
of wealthy individuals by merging International Time Recording Company
(IRTC), Tabulating Machine Company (TMC) and Computing Scale Company
(CSC) marked the beginning of informal venture finance in US. Rockerfeller
funded Venrock, Phipps funded Bessemer Securities, Rothschild funded New
Court and Watsons and Cornings funded Greylock. Venture capital Firms
like Venrock, Bessemer Securities, New Court and Greylock which were

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Agarwal, Agarwal & Solojentsev, Venture Finance Model for HR Capacity.... 385

supported by wealthy individuals promoted the growth of the venture finance

field. Sabeer Bhatia venture provided free email service and tried to earn
revenue by advertising on website. Later, this Draper Fisher Ventures (DFV)
invested US$ 3,00,000 in this project in 1996. DFV later exited by selling it to
Microsoft for US$ 400 million. Mr. Bhatia is also regarded as an angel investor
for NeoAccel.
Corporate Venture capitalism helped in the development of large number
of companies in semiconductors, computers, telecommunications, services,
medical, genetic engineering and instrument manufacturing. They were
developed as new ventures division (Fast, 1978), wholly owned ventures,
joint ventures (Roberts, 1979) and direct venture capital (Melberg, 1979).
Majority of the direct ventures failed as the internal people were unwilling to
leave the parent company (Colmen, 1979). The American Research and
Development was the first venture to be open for public investment and
financially supported Digital Equipment Corporation. Creation of Small
Business Investment Companies (SBIC) in 1958 provided the support of US
treasury to such companies who were given special borrowing rights and
tax benefits for supporting entrepreneurial ventures. The sharp increase in
capital gains tax to a high of 49% in 1970s prevented the growth of venture
finance industry. In 1980s however because of tax related support the industry
grew from two hundred firms with capital of US$ 2.9 billion in 1979 to seven
hundred firms with capital of US$ 30 billion in 1989 (Timmons and Sapienza,
1992). In the 1990s the possibility of initial public offering supported the
venture capital industry. However, on the flip side the venture capital industry
in US was limited to certain geographical area and due to the dot.com crash,
which the industry suffered greatly.
1.2.2 Growth of Venture Capital in Europe
In Europe the venture capital investment can be observed from investment
pattern of companies in 1970s like 3i in the UK, Investco in Belgium and
SVETAB in Sweden. In UK the venture capital industry grew from twenty
firms with capital of 20 million in 1970s to one thousand two hundred and
ninety seven ventures with capital of 1326 million in 1992 (Murray, 1995).
The period from 1986 to 1990 saw the growth of venture finance industry in
Europe more than that in US. In Europe it grew from $9 billion to $ 29 billion
in Europe (Bygrave and Timmons, 1992). Development of Third Market or
Alternative Investment Market in the UK, Nouveau Marche in France and
the Neuer Markt in Germany and later European secondary stock market
(EASDAQ) helped high risk companies to raise finances which could not
otherwise access the main market. Unfortunately these markets did not
succeed due to low level of investor protection.
1.2.3 Growth of Venture Capital in Asia
In Asia the Venture capital industry grew from 1995 to 2000. All the
three forms of venture capital firms were present but the formal categorisation
as a venture capital was given in 1990s. Venture capital industry in India
and China grew more rapidly as compared to other Asian nations. The delay
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386 Finance India

in development of venture finance industry was because of the lack of

regulatory and legal framework. Hong Kong, Singapore and Taiwan have
shown signs of development of the over the counter market.
1.2.4 Growth of Venture Capital in Africa (Ghana)
In the African subcontinent very limited empirical work is present on
venture finance. Financing of small and micro-enterprises undertaking new
ventures has been promoted primarily by government initiative. In Ghana,
Business Assistance Fund (BAF) was established to provide funds and
advisory services to new ventures. BAF was suspended in 2000 as it could
not achieve the desired objectives. For supporting new ventures in non-
traditional export sector Export Development and Investment Fund (EDIF)
was established. It gave employment to approximately two thousand
individuals and provided a credit of sixty billion cedis (ISSER, 2003).
Two interesting case that have led to innovation and developing modern
means has been the use of Mobiles in Africa in the early 2000s to transfer
money1 and the creation of the National Solidarity Fund (26-26 Fund) in
1992 and National Employment Fund (21-21 Fund) in 1999 by President Ben
Ali (Agarwal, 2007). The Fund creation was proposed by President Ben Ali
was also accepted by the UN General Assembly on 20th December 2002. The
Fund Model has reaped fruits in Tunisia, where President Ben Ali
implemented the model to reduce poverty, enhance employment, empowering
women through education and technical skills and identifying shadow areas
to have equitable growth in the country. The Mobile mechanism used to
transfer funds in Africa was primarily to avoid Government regulations for
transfer funds and foreign exchange in the early 2000s. This model has been
picked up by various Mobile Service companies to transfer funds (making
payments), do stock exchange transactions (Istanbul Stock Exchange) and
in the process of developing a Credit Card facility on the mobile itself.
1.2.5 Growth of Venture Capital in India
The development of informal VC may be attributed to Jamsetji TATA. In
1869 Jamsetji TATA converted a bankrupt oil mill in Chinchpokli into a
profit earning cotton mill called Alexandra mill. He exited the business after
two years to fulfil his dreams in the areas of iron and steel, education and
power. Ramnath Goenka in 1919 ventured into trading or yarn and jute and
later exited to establish Indian Express in 1936. Jamnalal Bajaj established
Bajaj motors in 1926 with the funding received from Seth Bachhraj (a distant
relative of his father). In 1960 Ranjit Singh and Gurbux Singh who were
employees in a Japanese pharmaceutical company ventured into forming
Ranbaxy by borrowing a large amount of money from Bhai Mohan Singh. In
fact, the name Ranbaxy is formed by merging the names of the two
entrepreneurs RANjit & GurBUX. This pharmaceutical business was
later acquired by the financier Bhai Mohan Singh when both Ranjit and
Gurbux could not pay their dues. Dirubhai Ambani in 1962 ventured into
import of polyester yarn and export spices through Reliance Commercial
Corporation. Sudha Murthy funded Infosys in 1981 which later

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Agarwal, Agarwal & Solojentsev, Venture Finance Model for HR Capacity.... 387

revolutionised Indian Information Technology Sector. Biocon was established

as a joint venture between Biocon Biochemical Ltd. (Ireland) and Kiran
Mazumdar Shaw (India) to promote biotechnology in India. Kinetic
Engineering Ltd. financed by Firodias and Motwanis pioneered the idea of
personalised transportation by launch of Luna Moped in 1972. Anant Koppar
(1997) established Kshema Technologies as a software service industry for
Industrial automation, healthcare, life sciences and mobile telephony. It was
acquired by Mphaisis in a stock-cum-cash deal. Sunil Bharti Mittal started
his making business by crankshafts for local bicycle with money borrowed
from his father. Mr. Mittal promoted many ventures like manufacture of
push button telephones and now Airtel. Bharti group has also ventured
with Rothschild family for fruit and vegetable processing and exports. Kishore
Biyani (1997) created Indias first large format value for money retail chain.
The business model used by Biyani is similar to that of Sears in the US and
Tesco in UK and other European countries. Some of the other prominent
ventures have been of Lijjat Papad, Amul, Banaras Hindu University, Nalanda
University, Takshila, Channakyas Chandra Gupta Maurya Empire and IIF
pioneering Business Finance education and Research in India (see Table I).
To promote foreign venture capital firms to invest in India, Securities
and Exchange Board of India (SEBI) brought the Foreign Venture Capital
Investors Regulations, 2000. In this the foreign VC have the freedom to buy
and sell the shares of new companies at any valuation which they deem fit
and can also exit any time provided they are registered investors. However,
Reserve Bank of India which approves foreign venture capitalist in India
follows a conservative policy by permitting on those foreign VCs which are
adequately capitalised. Moreover, new foreign venture capitalist will be
permitted to invest only in ten sectors including infrastructure, biotechnology,
nano technology, R&D of new chemical entities in pharma sector, dairy,
poultry and bio-fuels. The increase in the minimum paid up capital for an
Initial Public Offer led to the development of Institutional venture finance in
India. Institutional venture finance started with development of Technology
Development and Information Company of India Ltd. (TDICI) in 1988
promoted by ICICI and UTI. TDICI has funded many new ventures including
MASTEK (1992), Temptation foods (1992), Rishabh Instruments (1989) and
Synergy Art foundation (1994). Credit Capital Venture Fund is regarded as
the first private VC fund that was sponsored and promoted by Credit Capital
Finance Corporation (CFC), Bank of India, Asian Development Fund and the
Commonwealth Development Corporation. In India, the VC funds are
promoted by the Central Government through development finance
institutions like Risk Capital funded by Industrial Development Bank of
India (IDBI) and Risk Capital and Technology Finance Corporation Ltd.
(RCTFC) by Industrial Finance Corporation of India (IFCI). Second category
is of VC funds promoted by state government controlled development finance
institutions like Andhra Pradesh Venture Capital Ltd. by Andhra Pradesh
Finance Corporation (APSFC) and Gujarat Venture Finance Company
Limited (GVCFL) by Gujarat Industrial Investment Corporation (GIIC). Third

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388 Finance India

category is of VC Funds promoted by Public Sector banks like Cafina by

Canara Bank and SBI-Cap by State Bank of India (SBI). The fourth category is
of VC Funds promoted by Indian and foreign private banks including Indus
Venture Fund, Credit Capital Venture Fund and Grindlays India
Development Fund. A large number of foreign venture capital funds entered
India after 1995. The venture finance in India has led to the meteoric growth
in areas like biotech, IT, communications, semiconductors and
pharmaceutical industry.
1.3 Job Creation from Venture Capital Financing
Byrgrave and Timmons (1991) observed that around two lakh thirty
thousand jobs were created in United States by venture capital financing. It
led to the development of skilled labour in companies like Apple, Intel, Federal
Express, Lotus Development, Compaq, Digital Equipment Corporation and
Microsoft. Belke, Fehn and Foster (2006) provided the pioneering empirical
evidence of a causal relationship between venture capital investment and
job creation on a macroeconomic level. They found that venture capitalism
does increase the growth rate of employment. Hence, while formulating a
policy on combating unemployment it is necessary to include certain
institutional provisions for promoting venture capital industry.
1.4 Focus and Layout of the Paper
This research paper has been divided into five sections. Section I covers
the introduction to venture finance, scenario of venture capital in United
States (US), Europe, Africa (Ghana), Asia and India and job creation by
venture capital financing. Section II undertakes a review of literature
discussing the existing understanding of venture capital firms and
entrepreneurs. Section III discusses how Venture Finance has boosted the
growth of Financial Engineering and Financial markets, and the current
position of Venture capital in India. Section IV undertakes an elaborate
Modelling of the Human Resource capacity building during the Pre-
Investment and the Post-Investment phase of a new venture. It also provides
a graphic view of firm level and macro-perspective of the Human resource
augmentation in a new venture. Section V provides a general overview of
global financial crisis and how employment disequilibrium can be tackled
by new ventures.
II. Literature Review
Early research in venture capital was focussed on the actions of venture
capitalists (Tyebjee and Bruno, 1984; MacMillan, Siegel and Narasimha,
1985; Gorman and Sahlman, 1989). They provided the basis for development
of theories in venture finance. Sahlman (1990) developed financial theory on
the agency issues and financial structure challenges in a venture capital
firm. Arthurs and Busenitz (2003) have pointed out the limitations of the
agency theory and the stewardship theory in explaining the investor/investee
decisions. Shanes (1997) pointed out the synergy created by venture capitalist
entrepreneur pairs. Shepherd and Ettenson (2000) studied how the
institutional venture capital firm tries to have maximum returns by making
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Agarwal, Agarwal & Solojentsev, Venture Finance Model for HR Capacity.... 389

decision during the selection stage of the venture capital cycle. Most of the
existing literature has focussed on institutional venture finance, which is a
much smaller phenomenon as compared to business angel investing (Mason
and Harrison, 1996; Landstrom, 1998; Freear, Sohl and Wetzel, 2002) both in
terms of the capital amount and the number of such investments.
The Venture capital firms have a tendency to be located in a particular
geographical region. In US venture capital offices are located in San Francisco,
Boston and New York. In Canada the venture capital firms are clustered in
Toronto (fifty nine percent), Calgary, Montreal (both nine percent) and
Vancouver (eight percent). In UK, seventy one percent of the venture capital
firm are located in Greater London. However a greater dispersion of venture
capital firms was observed in Germany with Munich having less than twenty
percent of the total firms (Fritsch and Schilder, 2006). In India, geographical
location of the new ventures is dependent on the incentives provided by the
government. Hence, the new ventures (e.g. Tatas Nano, cheapest car in the
world) are geographically dispersed all over India rather than being
concentrated in one or more metros. Moreover, venture capitalist also prefer
to invest locally only i.e. in their own country and in regions which are
located near to them. By undertaking local investments the venture capital
firms tend to reduce uncertainty and hence try to minimise risk (Florida and
Kenney, 1998; Florida and Smith, 1991). In case the other factors are very
favourable in a venture then venture capital firms do tend to fund such
ventures (Mason and Rogers, 1996).
Research on structure of venture capital funds shows that the emergence
of institutional venture finance can be seen in the years post second world
war with the development of American Research and Development (ARD),
limited partnership in 1950s and emergence of Small Business Investment
Companies (SBIC). In 1979 even US pension funds were permitted to invest
in riskier ventures (Gompers and Lerner, 1998). Increasingly contracting out
of investment management to independent funds emerged as a dominant
form of venture capital industry during the period of 1997 to 2001 (Thomson
Venture Economics Databank). As regards the number of new venture capital
firms, the independent venture capital firms have dominated over the
corporate venture capital and financial institution venture capital. The
previously mentioned independent funds slowly developed into venture
capital limited partnership with general partners (professional venture
capital firms) and limited partners (pension funds, life insurance companies,
corporations, commercial and investment banks, universities, endowments,
foundations and wealthy individual). Mayer, Schoors and Yafeh (2005)
found that banks are the main source of funds in Germany and Japan. Pension
funds are the main contributor in UK. Captive venture funds are those funds
which are partly or wholly owned by banks, securities firms, larger diversified
financial institutions or a corporation other than the venture capital
professionals. Corporate venture capital comprised five percent of the
Canadian venture capital market (Cumming and MacIntosh, 2006) and six
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390 Finance India

percent of US venture capital market in 2003. The capitalists in captive venture

funds have lesser autonomy than limited partnership venture capitalists
(Gompers and Lerner, 1999). Hence, those managers who were performing
well in captive venture capital funds were hunted by limited partnerships.
Government funded venture capital funds had multiple welfare objectives
like improving financing options to younger firms, increase employment,
foster innovation and enhance economic growth (Kortum and Lerner, 2000;
Jaaskelainen, Maula and Murray, 2004). In 1960s US Small Business
Innovation Research (SBIR) Programme led to the success of companies like
Intel Corporation, Apple computer, Federal Express and America Online.
Lerner (1999) found that the companies funded by SBIR had higher growth
rates than non-SBIR funded companies. Innovation Investment Fund (IIF)
Programme by Government of Australia in 1997 promoted the development
of venture capital firms and private equity firms in Australia. In Canada a
unique Labour Sponsored Venture Capital Corporation (LSVCC) was
developed (Cumming and MacIntosh, 2006). In UK Venture Capital trusts
were established (Cumming, 2003). The government subsidisation helped
foster innovation and economic development at a much faster rate.
On the pre-investment process, Tyebjee and Bruno (1984) developed a
model consisting of five steps: (i) deal origination; (ii) deal screening; (iii)
deal evaluation; (iv) deal structuring; (v) post investment. Georges Doriot,
the father of the venture capital and founder of ARD believed in investing in
good team with an average idea than an average team with a good idea. Over
the years the entrepreneurs personality, experience, characteristics of
products/service, characteristics of market, financial consideration and
venture team has been used as a basis for selecting and funding a venture.
The ownership of convertible debt and convertible preferred stock with voting
rights enables venture capitalists to control the levers in the new venture
using financial engineering (Gompers, 1997). In majority of cases the venture
capitalists tend to play the role of strategic decision making and provided
additional finance to the new venture. In certain cases the decisions of venture
capitalists may be contradictory to the welfare of the newly formed firm.
The effect of venture finance on innovation may be observed by the success
of technology driven ventures. The venture finance enables innovators to
quickly commercialise their product and make it available in the market. The
venture capital funding also lead to higher patenting (Kortum and Lerner,
2000). Hence, venture capital funding does protect the innovators from piracy
and coping of their technology. Venture capital funds have also acted as
catalyst in development of newer industries. Biotechnology, hard disk drives,
relational databases, workstations, local area network (Von Burg and Kenney,
2000) and minicomputers have all innovated with financial support of
venture capitalists (Bygrave and Timmons, 1992). Hochberg, Ljungqvist and
Lu (2004) found that venture capitalists tend to bring in other venture
capitalists along with themselves for funding in a new venture. This provides
them synergy by access to networks of head hunters, patent lawyers and

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Agarwal, Agarwal & Solojentsev, Venture Finance Model for HR Capacity.... 391

investment bankers. This helps the promoted venture to strike successful

deals. Engel (2004) found that this kind of syndication helped in overcoming
the informational asymmetries. The referral network of business associates
does tend to help them to tap potential investment opportunities (Wetzel,
1983). Performance tended to increases with increase in fund size and general
partners experience (Kaplan and Schoar, 2005). The reputations of venture
capitalists helps entrepreneurs attract higher tier underwriters and are able
to time the IPOs near the stock market peaks (Nahata, 2004). Financial
commitments by venture capitalists are often linked to the performance by
the company (Kaplan and Stromberg, 2000). Gompers (1994) found that
new venture capital firms tend to take the new ventures to the initial public
offer (IPO) market too early losing about one million dollars on each initial
public offer.
Female entrepreneurs tend to differ in their networking behaviours from
male entrepreneurs with females being less connected to other business angels
(Harrison and Mason, 2005). Hence, limited empirical evidence is present of
relevance of informal venture finance for female entrepreneurs. Prasad,
Bruton and Vozikis (2000) propounded a signalling theory according to
which the percentage of equity retained by the entrepreneur is a signal of
project quality. The higher the percentage of investment the stronger is the
signal of success of the venture. Bygrave, Hay, Ng and Reynolds (2003)
observed that the major finance for any new start up across eighteen countries
was found from the three Fs (family, friends and fools). According to the
Global Entrepreneurship Monitor the relationship between founding capital
and the business angels still remains largely un-investigated.
Tax breaks to the business angels and other informal investors can help
promote entrepreneurships (Bygrave and Hunt, 2005). Stedler and Perters
(2003) from data for Germany concluded that the acceptance for any venture
depends upon entrepreneur/management team, product/service uniqueness
and competitiveness, growth potential, profit margins, ability to achieve a
profitable position, opportunities exit options, rates of return and degree of
self financing. For promoting entrepreneurship in US Venture Capital
Network in collaboration with Centre for Venture Research at the University
of New Hampshire was developed for bridging the gap between profitable
ventures and venture capital providers. In Canada, Canada Opportunities
Investment Network (COIN) bridged the gap between the unmet need of
Canadian entrepreneurs and private savings. COIN was found to be of little
value by Blatt and Riding (1996). In UK, the Local Investment Networking
Company (LINC) helped aggregating local enterprises and provided them a
forum for discussions with venture capitalists. In Sweden, Chalmers Venture
Capital Network (CVCN) promoted technologies developed by Chalmers
University of Technology. CVCN helped matching technologies which could
be commercialised with search of angel investors of gainful opportunities.
Denmark felt the need for a government facilitator to promote the relationship
between business angels and entrepreneurs. National Agency of Industry
Indian Institute of Finance
392 Finance India

and Trade initiated Business Introduction Services (BIS). BIS helped

entrepreneurs in preparation of a business plan, financial plan and
negotiation. Koppel (1996) found the BIS initiative to be largely unsuccessful.
Finland innovatively developed a computed based matching service (Lumme,
Mason and Suomi, 1998). In this business angels could search from a pool of
investment options on which a summary will be provided by the entrepreneur.
In Singapore, Business Angel Network Southeast Asia (BANSEA) was
developed to meet the funding need of entrepreneurs. In Germany, Business
Angel Network Deutschland (BAND) was developed with patronage of
Federal Ministry for Economy and Labour. Kostopulosz (2004) observed the
German economy responding positively to the concept of BAND.
In Corporate Venture Capital (CVC) investments, the goals pursued by
the managers of the company may be very different from that of the promoter.
The managers of the Corporate Venture capitalist may be only interested in
making the venture a suitable candidate for acquisition. On the other hand,
the promoter of the venture may be interested in making the venture a leading
player in the industry (Zahra, Yavuz and Ucbasaran, 2006). It has also been
observed that CVC relationship involves unequal partners with needy new
ventures at the discretion of the large corporate. Alvarez and Barney (2001)
in a sample of one twenty eight ventures found that about eighty percent of
the biotech, information technology, and oil and gas industries ventures feel
exploited at the hand of large partners. The entrepreneurs fear misuse of the
proprietary technology and competitive information by the corporate
representatives of the CVC on their boards (Gompers and Lerner, 2001). This
concern of entrepreneurs is seldom eliminated by non-disclosure agreements.
Stuart (2000) found young semiconductor companies benefitting from
their alliances with large, CVC partners by augmented sales growth and
patent activity. Maula (2005) observed that major benefits which the new
ventures gain from their relationship with CVC include technological
knowledge, social capital, access to additional funds and foreign customers.
The newly formed firms have limited knowledge and can gain significantly
in building capabilities and upgrading existing ones (Lim and Lee, 2006).
Those ventures which are supported by CVC relationships are better in terms
of Knowledge Conversion Capability which includes the conversion of
scientific discoveries into efficiently commercialised successful products
(Zahra, Velde and Larraneta, 2006).
III. Venture Capital and Financial Engineering
3.1 How Venture capital has boosted Financial Engineering and Financial Markets
The need for new ways by which wealthy individuals, corporate and
institutions can invest in a newly formed venture contributed to the growth
of a large number of financial engineered institutions, instruments and
processes. Master Limited Partnership, Puttable Common Stock, Adjustable
Rate Convertible Debt, Convertible Exchangeable Preferred Stock, Convertible
Reset Debenture, Debt with mandatory Common Stock Purchase Contracts,
Exchangeable Auction Preferred Stock, Synthetic Convertible Debt, Zero

Indian Institute of Finance

Agarwal, Agarwal & Solojentsev, Venture Finance Model for HR Capacity.... 393

Coupon Convertible Debt, Warrants to purchase debt security, Zero Coupon

Bonds, Puttable Extendible Notes, Real Yield Securities, Receivable Pay
Through Securities, Remarketed Reset Notes, Stripped Mortgage Backed
Security, Stripped Treasury or Municipal Securities, Variable Coupon
Renewable Notes, Floating Rate Tax Exempt Revenue Bonds, Indexed
Currency Option Notes/Principal Exchange Rate Linked Security, Interest
Rate Reset Notes, Mortgage Pass-Through Certificates, Negotiable Certificates
of Deposit, Adjustable Rate Notes and Floating Rate Notes, Auction Rate Notes
and Debentures, Bonds Linked to Commodity Price or Index, Commercial
Real Estate-Backed Bonds, Credit Debt Security, Dual Currency Bonds, Euro
notes and Euro commercial Paper and Extendible Notes have revolutionized
the way finances can be raised by a new firm. For financing new ventures in
India apart from equity and debt new financially engineered hybrids like
conditional loan, Income note and participating debentures are being used.
3.2 Position of Venture Capital in India
From the Fiscal Policy perspective, in Union Budget of 2008-09 the
induction of asset management service provided under Unit Linked Insurance
Plans and on customised software under the service tax net will adversely
affect the growth of venture capital industry. Under the Income Tax Act the
reverse mortgage will not amount to transfer and hence revenue generated
will not be regarded as income for income tax purposes may foster growth in
reverse mortgage business. However, in the light of current financial crisis it
is unlikely that this incentive of the Government will be supported by actions
of entrepreneurs/institutions. Budget for 2008-09 will foster growth of
Corporate Venture capitalism as it has got relief from double taxation of
dividends. Now the parent company is allowed to set off dividends received
from its subsidiary company against dividend distributed by the parent
company provided the dividend received has suffered Dividend distribution
tax and the parent company is not a subsidiary of another company.
In India the participation of foreign venture capital firms is from countries
like Mauritius, Cayman Islands and Singapore in the areas like information
technology and real estate. This has been promoted by the supportive tax
policies by the governments. Double taxation rule is still hindering investments
from a large number of potential foreign venture capitalists. For monitoring
investments by foreign venture capitalists in India various innovative products
like Central server, Data Marts, Digital Dashboards, Knowledge management
Tools, mobile enabled tools, enhanced security tool and new types of system
integrators have been developed (CKP & VS Report 2008).
In India, entrepreneurship has got a boost by development of centres of
innovation management supported by government, educational institutions,
returned Non Resident Indians, Indian and Foreign Venture capital firms.
Entrepreneurial growth has suffered on account of lack of adequate
infrastructure including power, entry costs, coalition politics, labour laws,
tax laws and other regulatory compliances.
Indian Institute of Finance
394 Finance India

IV. Modelling Human Resource Capacity Building in Venture Capital

funded ventures
4.1 Human Resource Capacity Building Model
The production function in any firm requires two critical inputs i.e. Capital
and Labour. In a venture capital funded venture, human capability
augmentation takes place at one end with capital provider and on the other
hand with the capital receiver. Labour in a venture capital firm includes
both office and administrative staff and floor level workers. As in the consumer
theory the objective of a firm is to maximise output represented by
Maximise F (K, L) (1)
where, K is capital and L is labour
Subject to the cost constraint
wL + rk = C0 (2)
For cost minimisation the necessary condition includes that the marginal
products of all production inputs must be equal when these marginal
products are adjusted by the unit cost of each input i.e.
MPL/w = MPK/r (3)
So to minimise the cost and for achieving the results as represented by
equation (3) both the capital provider and receiver must ensure that human
capabilities are engaged in a manner that provides the maximum output to
an economy
As per the linear programming format of the Stochastic Goal
Programming Model (Agarwal, 1976) a firm will try to
Minimise C = ( Pi di+ + Pi di- ) (4)
Subject to
axi + uixi + di- - di+ = bi (5)
- +
xi, d , d > 0
i i
(6)
where, Pi refers to priority coefficients,
di+/- refer to positive and negative deviational variables,
ui is a random variable which is normally distributed with mean
zero and variance-covariance matrix ,
a is a matrix of fixed coefficient representing row vector, xi are the
column vector
bi is a function of all the goals i.e. Given that a venture capital firm
receiver and provider desire to achieve particular goals (x1, x2,.....,
xn) then bi = f (x1, x2,....., xn)
Now by using equation (1) to equation (2) for Human Resource capacity
building a priority based model is proposed. The extent to which human
personnel are employed depend on the priority the venture capital provider
and receiver pay to each of the below mentioned variables. Therefore a priority
based model for the pre investment phase is as follows.
Indian Institute of Finance
Agarwal, Agarwal & Solojentsev, Venture Finance Model for HR Capacity.... 395

4.2 Pre Investment Human Resource Capacity building Model

Schumpeter (1942); Baumol (1968); Leibenstein (1968); Tyebjee and Bruno
(1984); Drucker (1985); Kirzner (1985); MacMillan; Zemann and Narasimha
(1987); Rumelt (1987); and Teece (1987) have elaborated on the functions of
an entrepreneur and how his functionality is different from that of a manager.
However, there exists very little empirical evidence on how does an
entrepreneur lead to human resource augmentation in a new venture. With
increasing large scale retrenchment in the light of global financial crisis of
2008 it is important how does an entrepreneur can involve such retrenched
staff and help tackle increasing unemployment and contribute to growth in
the real sector. Entrepreneur has been kept as the alpha coefficient in our
model because of the ability to combine tangible and intangible resources in
novel fashion (Kirzner, 1973) and can specialise in development of new
business activities (MacMillan, Kulow and Khoylian, 1989). Akerlof (1970)
discussed the Information asymmetry problem in the used car market. In
venture finance information asymmetry also arises between the entrepreneur
and the VC firm. The entrepreneur is reluctant to share the entire details of
the project with the finance provider and the investor in a new venture tries
to know more and more about the venture. This contributes further in hiring
of more individuals to prevent adverse selection by the fund provider. During
the pre investment phase human resource has to be employed by the venture
capital provider for accepting, screening, negotiating, drafting and signing
on the contract. The entrepreneur has to employ human personnel that can
help in preparation of proposal
Maximise HRCB1 = + P1+/- DPS + P2+/- DAS + P3+/- DSS + P4+/- DNS + P5+/- DM
(7)
where, Entrepreneur and/ or innovator
DPS2 Deal proposing staff
DAS2 Deal accepting staff processing both solicited and
unsolicited proposals
DSS2 Deal screening staff undertaking technical and economic
feasibility of the venture
DNS2 Deal negotiating staff
DM3 Deal makers who may or may not form the board of the new
venture
4.3 Post Investment Human Resource Capacity building Model
Maximise HRCB1+ = P6+/- PDS + P7+/- LS + P8+/- MS1 + P9+/- MS2 + P10+/- RS
+ P 11 +/- OS + P 12 +/- ES + P 13 +/- FS + P 14 +/- PIMS
+ P 15+/- SDMS + P 16+/- HHS + P 17+/- LS + P 18+/- CCS
+ P19+/- SLS + P20+/- EDS (8)
where, PDS Product/service development staff
LS4 Labour for manufacturing the product or employees for
providing service
MS1 Managerial Staff supervising the line function

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396 Finance India

MS2 Marketing staff commercialising the new product/service

RS Research staff reviewing the product/service (including
receptiveness in the market) and suggesting changes for
further development
OS Operational staff taking both order and sales
ES Evaluation staff (ensuring quality and cost control)
FS5 Finance staff (managing the future liquidity requirements
of the venture)
PIMS6 Post investment monitoring staff of the venture capitalist
SDMS7 Strategic decision making staff may serve on the board of
the new ventures
HHS8 Head Hunting staff
LS Legal services staff taking care of patents
CCS Customer care staff
SLS Supplier liaison staff
EDS9 Exit determining staff of the venture capitalist
Equation (7) and equation (8) may be solved a linear regression equation
or as a Linear Programming problem with equation (3) as the constraint. The
aggregate effect of venture financing on employment growth may be seen by
drawing an analogy with the Keynesian Multiplier. The total Human
Resource capacity building will be much larger than what is purported by
equation (7) and equation (8). This is because each factor outlined in equation
(7) and equation (8) may hire other individuals for fulfilling their
responsibilities effectively. Hence, to understand the aggregate effect on the
economy the total Human resource capacity building is given by

HRCB = 1/1- bH (9)

where, represents the entire set of twenty factors mentioned in equation (7)
and equation (8)
bH is representing marginal propensity to hire.
4.4 Employment Market Equilibrium Model
The pre and post Human Resource Capacity Building (HRCB)
investment model can be extended to k factors using the Employment Market
Equilibrium Model, which is represented as
= + P1,1+/- 1........ + Pi,k+/- k + i (10)
Subject to
N
+ /
P
k =1
i,k =1

0 Pi,k+/- 1
i = 1,2, ....., N
where, is the equilibrium level of employment,
represents the factors mentioned in equation (7) and equation (8)
i is the random or unexplained employment augmentation with
E (i) = 0.
Indian Institute of Finance
Agarwal, Agarwal & Solojentsev, Venture Finance Model for HR Capacity.... 397

The Figure 1 below explains the total human resource augmentation

for a new venture. An informal Venture Capital (VC) includes a wealthy
individual or a business angel, corporate VC may use the services of a
larger number of individuals forming part of the corporate structure and in
case of an institutional VC a larger set of individuals forming part of the
pension funds or insurance companies or other financial institution may
employ a much larger set of individuals for searching and financing
profitable ventures.

P- P-
P P

Institutional VC
P+ P+

Corporate VC
Direction of
Informal Increasing
VC Human
Resource
Capabilities

VC is Venture Capital

Figure 1
Micro-Economic Perspective of the
Human Resource Augmentation at Firm Level
The Figure 2 below depicts the evolution of Human Resource capacity
building in a venture financed firms that has taken the shape of a spiral.
Informal Venture Capital (VC) being the oldest has the largest number of
individuals hired. The number of firms going for informal VC is the highest.
Also, the processing activity in an informal VC is least cumbersome and time
consuming. Informal VC further added to development of specially hired
individuals who are constantly looking for opportunities of Hostile takeover.
The conflict between the entrepreneur and the venture capitalist lead to
management buyout (MBO). For undertaking MBO especially skilled
managers were hired by the entrepreneur. With a need for a more formalised
structure of venture capitalism, corporate venture capitalism developed. This
form of venture capitalism augmented hiring of staff which could assist in
undertaking Initial Public Offer (IPO) and Mergers and Acquisitions (M&A).
With lesser number of firms financed by Corporate VC the human resource
base for corporate VC is smaller than that of Informal VC. With government
taking note of the contribution of venture capital funded firms helped
developing Institutional VC firms. This further promoted the growth of a
new profession of financial engineers who would develop new financial
instruments, processes and help in solving problems in finance by either
restructuring or undertaking risk management. The spread of the spiral
shows the total contribution to Human resource capacity building.
Indian Institute of Finance
398 Finance India
FEV

Institutional
Venture Capital

GSV

Corporate Venture
Capital
M&A
IPO

MBO

Informal Venture
Capital

HTS

Note: HTS Hostile Takeovers Staff

MBO Management Buyout
P Purchase of stake by Public by Initial Public Offer (IPO)
M&A Mergers and Acquisitions
GSV Government Supported ventures
FEV financially engineered ventures
Figure 2
Macro-Economic Perspective of the
Human Resource Augmentation Spiral at International Level
4.5 Assumptions of the VC-HRCB Model
The model is an abstraction of the real world for employment capacity
building and is based on some assumptions. The assumptions have been
included to make the model more tractable from mathematical point of view.
The HRCB Model assumptions are as follows
Assumption 1: Firm will try to maximise marginal productivity of all employed
factors.
Assumption 2: Venture Capitalists and individuals employed in new ventures are
rational.
Assumption 3: Entrepreneur / Innovator are necessary for all new ventures.
Assumption 4: Employment markets are competitive i.e. employment market is in
equilibrium.
Assumption 5: The model is applicable for one period time horizon. The results
will be affected by a different assumption as regards time period.
Assumption 6: There exists an employment exchange market for hiring of skilled
individuals i.e. there is no constraints as regards the availability of employees
with a particular skill set.
Indian Institute of Finance
Agarwal, Agarwal & Solojentsev, Venture Finance Model for HR Capacity.... 399

Assumption 7: Firms hire and retrench employees during the lifetime of the firm.
Assumption 8: The supply of entrepreneurs is limited in the economy.
The Assumption 5 can be relaxed by adopting a dynamic modelling
approach.
4.6 Limitations of the VC-HRCB Model
The following limitations have been observed in the Model
i. Testing the model for short periods may not give suitable results.
ii. The model assumes static relationship which may be dynamic.
iii. The model believes that the employment capacity building is a simple
structural form because it is mathematically tractable.
iv. The model does not the find the covariance among mentioned factors i.e.
how does one factor affect employment augmentation in other factor.
v. Enormous data requirement limits the use of the model (as each regression
for finding priority coefficient will require 21 inputs).
vi. Unidentified factors contributing to HRCB may still remain.
4.7 Life Cycle Hypothesis for a Venture Capital provider and Innovator/Entrepreneur
Life Cycle Hypothesis states that a venture capital provider will invest
in a venture and continue to stay with it till it is successful and then exit for
profits. An entrepreneur in a VC funded enterprise continues to either stays
with the successful venture or undertakes an exit for profits. After exiting the
successful venture the entrepreneur either becomes an Angel Investor
promoting innovation based ventures or starts a new innovative venture
along with venture finance providers. (see Figure 3)

Venture
Capital
Provider

Exit Spectrum

Successful
Enterprise Venture

Or

Angel Investor
Innovator/
Entrepreneur

Figure 3
Life Cycle Hypothesis for
a Venture Capitalists, Innovator and Entrepreneur
The hypothesis has been observed for a number of successful
entrepreneurs including Jamsetji TATA (India), Ramnath Goenka (India),
Anant Koppar (India), Gurbaksh Chahal (US), Sabeer Bhatia (US) and Sunil
Bharti Mittal (India). They entered new ventures with support from business
angels and later exited for profits. Their super ambitious genes prompted

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400 Finance India

them to start new venture again and later exit for enormous profits. Such
entrepreneurs either continue to remain in the cycle or exit it by becoming
angel investors themselves. For example, in 1869 Jamsetji TATA converted a
bankrupt oil mill in Chinchpokli into a profit earning cotton mill called
Alexandra mill. He exited the business after two years to fulfil his dreams in
the areas of iron and steel, education and power. Ramnath Goenka in 1919
ventured into trading of yarn and jute and later exited to establish Indian
Express in 1936. In 1960 Ranjit Singh and Gurbux Singh who were employees
in a Japanese pharmaceutical company ventured into forming Ranbaxy by
borrowing a large amount of money from Bhai Mohan Singh. In fact, the
name Ranbaxy is formed by merging the names of the two entrepreneurs.
This Pharmaceutical business was later acquired by the financier Bhai Mohan
Singh when both Ranjit and Gurbux could not pay their dues. Recently, the
present CEO Malvinder Mohan Singh exited this profitable venture by selling
the promoters stake of 34.82% to Japanese pharmaceutical company Daiichi
Sankyo (www.livemint.com).Anant Koppar (1997) established Kshema
Technologies as a software service industry for Industrial automation,
healthcare, life sciences and mobile telephony. It was acquired by Mphaisis
in a stock-cum-cash deal. Sunil Bharti Mittal started to make crankshafts for
local bicycle with money borrowed from his father. Mr. Mittal later exited to
create successful ventures like manufacture of push button telephones and
now Airtel. Bharti group has also ventured with Rothschild family for fruit
and vegetable processing and exports. Gurbaksh Chahal (US) made his way
from rags to riches as he earned US$ 3,00,000 a month from Internet
advertising company he founded at his home. He exited in his first venture
(Click Agent) in 2000 by selling it for US$ 40 million. His second venture,
Blue Lithium was bought by Yahoo for US$ 300 million. Now the young
entrepreneur is planning a new venture of developing a reality TV show in
India. Sabeer Bhatia (US) venture provided free email service and tried to
earn revenue by advertising on website. Later, Draper Fisher Ventures (DFV)
invested US$ 3,00,000 in this project in 1996. DFV later exited by selling it to
Microsoft for US$ 400 million. Mr. Bhatia is also regarded as an angel investor
for NeoAccel.
V. Global Financial Recession and India
The changing structure of world investment, trade, capital flow and the
need for deeper integration has been the wave of the last three decades. There
are over US$ 6 trillion worth of transactions that take place on a daily basis,
which is equivalent to the total world trade every year. Globalization has
altered the economic frameworks of both developed and developing nations
in ways that are difficult to comprehend. The persistent rise in the dispersion
of current account balances of the world as a whole, wherein the sum of
surpluses match the sum of deficits has grown substantially since the World
War II. The emergence of unregulated global markets in the 1990s had
appeared to have moved towards a more stable and growth oriented economic
globe. However the economies have been hit one after the other with the
fashion and need for market driven capitalist and liberalized economic

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Agarwal, Agarwal & Solojentsev, Venture Finance Model for HR Capacity.... 401

systems. The emergence of the crisis in the last 20 years since 1982 beginning
with USA (1982, 1989, 2007-08), India (1991), Russia (1992, 1998), Mexico
(1994), East and South East Asian (1997), Brazil (1999), Argentina (2001)
and the most recent financial turbulence observed in 2008 in US and Europe
estimating an impact of over US$ 3 trillion with over US$ 700 bn already
bailed out by the US Treasury clearly bringing forth the failure of Banking
and Financial Institutions which serve as the back bone of an economy or life
blood of an organization. This brings forth the vitality for the need for
appropriate financial know-how and knowledge with practical outlook and
not based on mere theoretical understanding or empirical analysis of finance
in HR Capacity Building.
An aggregate of around three trillion dollars by United States (US$ 700
billion), United Kingdom (US$ 691 billion), Germany (US$ 680 billion), France
(US$ 492 billion), Russia (US$ 200 billion), Switzerland (Swiss Fancs 6
billion), Ireland (US$ 544 billion), Norway (US$ 57 billion), Portugal (US$ 27
billion), UAE (US$ 33 billion) and Greece (US$ 38.25 billion) will be injected
into the world economy to prevent the current Global financial crisis. With
majority of individuals in companies like Fannie Mae (US), Freddie Mac
(US), Lehman Brothers (US), Bear Sterns (US), AIG (US), Goldman Sachs
(US), Morgan Stanley (US), Hypo Real Estate (Germany), Fortis (Belgium-
Dutch), UBS AG (Switzerland), Credit Suisse Group AG (CS)
(Switzerland),VTB (Russia), Sberbank (Russia), Vneshekonombank (VEB,
Russia), Gazprombak (Russia), Royal Bank of Scotland (UK), HBOS (UK),
Lloyds TSB (UK) undergoing a credit crisis, there are chances of an
unemployment bubble. The main businesses of the banks of providing credit
is likely to remain slow for another two years. It is necessary hence to prevent
such a bubble by growth of new ventures.
As per the model outlined Human resource capacity building is highest
for new ventures. This knowledge may be used for providing employment to
those who may lose jobs in current financial crisis and even new ventures
will benefit as they generally starve for skilled staff. The Venture finance
industry today seeks financial executives who have good quantitative
(mathematical) and communication skills with practical wisdom. The new
ventures require individuals with working knowledge of Accounting for
Financial Analysis & Projections; Economics for Decision Making; Sensitive
Financial Forecasting with use of QT/OR/Financial Econometrics; Financial
Engineering; Stochastic Business Valuation through M&As; Derivatives;
Global Financial Systems and Risk Estimation & Analysis. New ventures
financing and financing innovation hold the key to the rising unemployment
disequilibrium.
VI. Conclusion
This paper traces the growth of classical venture finance in India to 5th
century BC. Maurayan Empire (350 BCE), Takshashila and Nalanda
University are all examples of classical venture finance. Informal VC still
remains the most dominant form of funding in US, Europe, Asia and Africa.
However, US and Europe have developed strong mechanism for institutional
Indian Institute of Finance
402 Finance India

venture finance. Institutional venture finance developed in Asia in the late

1980s and early 1990s and in Asia and Africa these are still trying to develop
right mechanism for supporting innovation based ventures. This research
has also tried to uncover the impending issues in current literature. They
include Prisoners Dilemma, Geographical Clustering, Innovation
Management, Signalling Theory, Venture Synergy, Information Asymmetry
and Financial Engineering. The section on India has tried to give an overview
of the architecture of venture capitalism in India and how government policies
are affecting the growth of venture finance.
The Sub-prime financial crisis will pose an enormous negative
externality of unemployment across the globe. It is estimated that about 1.18
million jobs will be lost in US alone (Bloomberg). Similar effect is anticipated
for the countries whose economies are interlinked with US. For overcoming
this unemployment bubble a linear programming HRCB Model has been
recommended. Model has been divided for the Pre-Investment and Post-
Investment phase. For understanding the total effect of each of the twenty
variables mentioned in the model an analogue with the Keynesian multiplier
has been drawn. Even in 5th century BC Nalanda University (venture
financed) employed over two thousand teachers and trained / educated
over 10,000 students. Graphical analysis at the micro level shows that an
informal Venture Capital (VC) includes a wealthy individual or a business
angel, corporate VC may use the services of a larger number of individuals
forming part of the corporate structure and in case of an institutional VC a
larger set of individuals forming part of the pension funds or insurance
companies or other financial institution may employ a much larger set of
individuals for searching and financing profitable ventures. Hence, at firm
level, maximum Human Resource augmentation takes place when new
ventures are promoted by institutional venture capitalists. Graphical analysis
at the macro levels shows that the evolution of Human Resource capacity
building in a venture financed firms has taken the shape of a spiral. Informal
Venture Capital (VC) being the oldest has the largest number of individuals
hired. The number of firms going for informal VC is the highest. Also, the
processing activity in an informal VC is least cumbersome and time
consuming. Informal VC further added to development of specially hired
individuals who are constantly looking for opportunities of Hostile takeover.
The conflict between the entrepreneur and the venture capitalist lead to
management buyout (MBO). For undertaking MBO especially skilled
managers were hired by the entrepreneur. With a need for a more formalised
structure of venture capitalism, corporate venture capitalism developed. This
form of venture capitalism augmented hiring of staff which could assist in
undertaking Initial Public Offer (IPO) and Mergers and Acquisitions (M&A).
With lesser number of firms financed by Corporate VC the human resource
base for corporate VC is smaller than that of Informal VC. Moreover Corporate
VC firms are mainly interested in listed companies which limit the number
of companies they can finance. With government taking note of the
contribution of venture capital funded firms, it helped in developing
Institutional VC firms. This further promoted the growth of a new profession

Indian Institute of Finance

Agarwal, Agarwal & Solojentsev, Venture Finance Model for HR Capacity.... 403

of financial engineers who would develop new financial instruments,

processes and help in solving problems in finance by either restructuring or
undertaking risk management. The spread of the spiral is maximum at the
Informal VC level, narrowing for Corporate VC and further narrowing for
Institutional VC. It may be concluded that promotion and sustenance of new
ventures can help overcome the unemployment bubble that will be created
by the Sub-prime financial crisis.

Notes
1 discussion with Stephen Schaefer at LBS in 2004
2 Tyebjee and Bruno (1984)
3 Tyebjee and Bruno (1984) ; Gompers (1997)
4 Kortum and Lerner (2000) ; Ljungqvist and Lu (2004)
5 Bygrave, Hay, Ng and Reynolds (2003)
6 Maula (2005)
7 Gompers and Lerner (2001)
8 Gompers and Lerner (1999) ; Hochberg, Ljungqvist and Lu (2004)
9 Zahra, Yavuz and Ucbasaran (2006)

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Indian Institute of Finance

404 Finance India

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