Venture Capital, Islamic Finance and SMEs

The primary scope of this book is to explore the operations of the venture capital sector in supporting the growth and development of SMEs. A distinctive focus is the analysis of techniques used by venture capitalists to value, structure and monitor their investments. The empirical analysis, conducted in India, fills gaps in academic knowledge; the role of Islamic finance as an alternative source of risk finance for SMEs is also covered.

Mansoor Durrani is a financial consultant based in India.

Grahame Boocock is Senior Lecturer in Banking and Finance, and Director of Industrial and Professional Studies at the University of Loughborough Business School.

List of Tables

xi

List of Figures

xii

Preface

xiii

Currency Exchange Rates

xiv

Glossary

xv

Introduction

1

(4)

An Introduction to the Small Business Sector

5

(15)

Introduction

5

(2)

The benefits of SMEs

7

(4)

SMEs: employment opportunities

7

(1)

SMEs: flexibility and innovation

8

(1)

SMEs: internationalization

9

(2)

Characteristics of SMEs

11

(5)

Profiles of successful/unsuccessful SMEs

16

(3)

Summary

19

(1)

Barriers to Growth in SMEs

20

(15)

Introduction

20

(1)

Barriers to growth: finance-related

20

(7)

Non-financial barriers to growth

27

(3)

SMEs: a case for government support?

30

(3)

Summary

33

(2)

An Introduction to Venture Capital

35

(17)

Introduction

35

(1)

Definition of venture capital

36

(1)

History of venture capital

37

(1)

Evolution of contemporary venture capital

38

(1)

The spectrum of venture capital

38

(6)

The venture capital institutions

39

(1)

Formal venture capital

40

(1)

Corporate venture capital

41

(1)

Social venture capital

42

(1)

Business angels

43

(1)

Venture capital in established markets

44

(1)

The dissemination of venture capital

45

(2)

The macroeconomic impact of venture capital

47

(4)

Summary

51

(1)

Venture Capital: Theoretical Foundations for Research

52

(20)

Introduction

52

(2)

Theoretical foundations of research into venture capital

54

(5)

Theory of the firm

54

(1)

The principal-agent relationship

54

(1)

Adverse selection

55

(1)

Theory of contracts

56

(2)

Corporate governance

58

(1)

Moral hazard

59

(1)

The venture capital investment process

59

(12)

Fund raising

60

(1)

Deal generation

61

(1)

Initial screening

62

(1)

Due diligence

62

(3)

Valuation

65

(1)

Approval and structuring

66

(2)

Monitoring

68

(2)

Exit

70

(1)

Summary

71

(1)

An Introduction to India: The Economy, Financial System, SMEs and Venture Capital

72

(26)

Introduction

72

(1)

The Indian economy

72

(5)

Financial system

77

(6)

SMEs in India

83

(4)

Venture capital in India

87

(10)

History

87

(5)

Current position

92

(2)

Prospects

94

(3)

Summary

97

(1)

Venture Capital in India: The Analytical Framework

98

(24)

Introduction

98

(2)

Scope of the research

100

(1)

Research objectives

101

(1)

The characteristics of venture capital funds

102

(1)

Risk management strategies

102

(18)

Valuation

102

(1)

Valuation information

103

(2)

Valuation techniques

105

(2)

Structuring

107

(1)

Contractual covenants

108

(3)

Staging of investments

111

(1)

Choice of financial instruments

112

(4)

Monitoring

116

(1)

Monitoring mechanisms

116

(3)

Replacement of CEOs in investee companies

119

(1)

Reasons for replacement of CEOs

120

(1)

Summary

120

(2)

Venture Capital in India: Research Methodology and Findings

122

(26)

Introduction

122

(2)

Descriptive profile of survey participants

124

(7)

Investigating the propositions

131

(13)

Conclusions

144

(2)

Valuation

144

(1)

Structuring

145

(1)

Monitoring

146

(1)

Summary

146

(2)

Business Ethics and Venture Capital in Islam

148

(22)

Introduction

148

(1)

The adverse consequences of growth

149

(1)

An alternative view

150

(1)

Ethical principles in Islam

150

(3)

Business ethics in Islam

153

(5)

Ethical investments

153

(1)

Compliance with contracts

153

(1)

Deceptive advertising and misrepresentation

154

(1)

Accurate measurement and weights

154

(1)

Hoarding and destruction of surplus produce

154

(1)

Fair recruitment practices

155

(1)

Human resource practices

155

(1)

Corporate governance

155

(1)

Environmental protection

156

(1)

Wealth distribution

156

(1)

Prohibition of interest

157

(1)

The differentiator

158

(1)

Venture capital and Islamic finance

159

(4)

Towards acceptable Islamic VC procedures

163

(5)

Valuation

164

(1)

Structuring

165

(3)

Summary

168

(2)

Conclusions

170

(23)

Introduction

170

(1)

Review of key themes

170

(9)

Key findings of the research programme

179

(2)

Islamic finance

181

(1)

Implications for policy makers, SMEs/entrepreneurs, finance practitioners and academics

181

(12)

Policy makers

181

(7)

SMEs/entrepreneurs

188

(1)

Venture capitalists

189

(1)

Islamic finance

190

(1)

Academic researchers

191

(2)

Notes

193

(3)

References

196

(22)

Index

218

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Venture Capital, Islamic Finance and SMEs Valuation, Structuring and Monitoring Practices in India

Summary

Author Biography

Table of Contents

Supplemental Materials