14

Finance

K.A. Joseph


1.0. Introduction

The very objective of this Conference is to examine how we are equipped with data and information, from the point of view of development of Kerala. Finance is undoubtedly the jugular vein of development. The banking sector as well as the Reserve Bank of India generates substantial data on the flow of finance in the State. Such data help both the planners and the financial institutions to plan, design, and implement programmes at various levels.

It is now a well-accepted fact that normal channels of finance do not often satisfy the development priorities to a reasonable extent. It is this realization that lead to the setting up of development finance institutions. But, even the better wisdom of development finance institutions (DFIs), often does not lead to the actual grounding of inventions and project ideas into action. This is because, innovative areas do not have any beaten track on which the financial institutions and the entrepreneurs can proceed. It is at this level that the services of a venture capital (VC) company become relevant.

2.0. Venture Capital: A New Concept of Finance

Venture capital financing, which is distinct from the above mentioned traditional sources, is an alternative financing source, particularly when an industry is technology-based, the entrepreneur inexperienced, and investment carries high risk of loss. In such circumstances banks and institutions do not advance money to entrepreneurs; the only succour lies with venture capitalists who provide risk capital. Venture Capital is a means of funding business enterprises where the perception about risk contents is high. VC funding finds special relevance in the areas of high technology & SSI sectors.

In the case of VC funding, it is often not possible to establish viability through well laid down benchmarks as in the case of conventional financing, especially because data regarding existing units, technology capabilities, market acceptance etc. is not available. The risk element is high often (not because of any unsoundness in the business model, but more) because of the unfamiliarity of the domains as indicated earlier. Failure rates are very high and so too are the prospects for high levels of return.

The history of venture capital companies in India is as old as 1985. To popularize venture capital financing, the Government of India announced the creation of a Venture Capital Fund in the document on Long term Fiscal Policy presented to the Parliament by the Finance Minister on December 20, 1985. Kerala Venture Capital Fund was set up in 1990, in order to fund ventures in the high technology areas such as Information Technology (IT) and Biotechnology (BT).

3.0. Data Requirements

What data does a venture capital company require? As we have noted above, risk analysis is the crucial constituency of such a company. There has, therefore, to be a very reliable and precise, to the maximum extent possible, means of evaluation of risk contents in the projects being appraised for funding. The risks of the projects are of two types viz., promoter and business. The best means to access promoters is through examining their track records. But one also need to know meticulously on what the industry is all about and how it performs on day-to-day basis.

To asses the risks with respect to business, the following data are required:

A review of available database on Kerala industry shows that such a database is not available for IT & BT sectors, though these sectors have been given significant thrust in the Industrial Policy and the Tenth Five Year Plan of the State. Therefore, it is important that, the following areas are taken care of immediately.
  1. Identify potential ventures- start-ups/high growth companies- for venture capital funding.

  2. Evaluate possibilities of outsourcing opportunities for Kerala-based companies from within and outside the country. This would help nurturing the industry.

  3. Help evolve policy options for the Government for promoting the industry in general and specific segments in particular.

  4. Identify successful organisations as role modules.

To get a sound judgment about the returns of the projects, it is also necessary to assess the prospects of the above through an in-depth analysis of factors such as suitability of the location for the project on account for the skill levels available (which is quite critical for knowledge based industries such as IT & BT). In the short-run, from the point of view of venture financing, it is vital to have the following data.

  1. Data on track records of entrepreneurs; the local financial institutions.

  2. A sound and comprehensive data bases on IT & BT units, which are periodically updated; this should include date on operating domains, performance and financial position of units etc.

  3. A list of entrepreneurs and professionals in the field.

  4. Case histories, especially of success stories.