Venture Capital is one of the best sources for a Startup to get capital for reinforcing their ideas into a successful business.
Venture Capital is the Fund/investment provided to the startups with scalability and potential to grow in exchange for equity holding in the Company.
Simply put, Venture capital helps the Startups in need of funds after carefully weighing the growth potential in their ideas. In exchange for such investment, the investors expect equity in return, eventually resulting to a profitable exit from the Startup a few years down the line.
What is a Venture Capital Fund?
A venture capital is the investment provided by Venture Capital Funds to Startups and SMEs against the equity holding of such Companies.
Venture Capital Fund(s) are Category 1 Alternative Investment Funds registered with SEBI under the AIF Regulations. Venture Capital Firms/Funds pool and manage money from investors seeking private equity / a portion of ownership in a Startup or SME having a strong potential to grow.
Venture capital pool investments from high net-worth individuals (HNI’s), insurance funds, pensione funds, investment banks, private equity funds etc. Investments by Venture Capital Funds are in the form of Funds, but sometimes they also contribute be in a form of technical or managerial expertise.
VC’s make their investment based on an array of considerable variable factors like the Start-up’s asset size, product development stage, market acceptability, uniqueness of space, marginal growth etc.
Venture Capitals are generally high-risk high reward investment vehicles. Such investment is subject to lock-ins and are subject to longer periods of maturity. The returns on such investments are often uncertain as the investments are based on assessed potentials of the startups.
However, on the bright side, a Venture Capital Fund achieve exponential returns when the odds are right. An investment in a right idea (Startup) with potential to grow is essentially the right market for VC Funds
Investments, Returns & Exit Strategies
Venture capital funds facilitate the investors to invest in status with high-growth until such startups achieve a certain size and valuation. Venture capitals funds exit such startups/investments are either sold to large corporations or go through an IPO.
Unlike the other type of investments like bonds, stocks etc., Venture Capitalists invest the Startup’s ideas and their growth potentials. VC’s can only generate returns when they exit a startups. The investments made are generally for short periods and the VC’s exit when their invest is mature or when the right time comes. Some of the most prevalent exit strategies employed by VC’s are briefly defined below:
- Direct sale of shares – On maturity or in accordance with the investment documentation, VC Funds may sell its shares in the Startup to other investors or the Startup itself.
- Acquisitions – It has been observed that large corporates tend to acquire or buy the entire stake of a Startup which have achieved appreciable growths post receiving investments from VC’s. Such an acquisition leads to automatic buying out the shares held by VC fund(s).
- IPO (Initial Public Offering) – When a Startup takes a decision to offer its shares to public at large through a public offer (listing) the venture Capital funds also ends up selling its shares in the company.
Who is a Venture Capitalist?
Venture Capitalist are professional investors (generally firms or entities) engaged in facilitating investments for startups and business showing high potential for growth against a stake in equity.
Venture Capitalists are generally incorporated as limited partnerships or trusts where the partners or trustees are the investors in the Fund. The partners can be generally categorised in two categories namely Limited Partners and General Partners.
Limited Partners are the investors to a Venture Fund which provide monies to the funds. LP’s are generally institutional investors like endowments funds, insurance companies, family offices, pension funds, other big corporates and HNI’s.
General Partners also known as GP’s are also investors to the Venture Funds who are responsible for the investment decisions and strategies of the funds. GP’s are industry experts with expertise in business, finance, investment, banking and Startup ecosystem, and usually smaller investors as compared to the LP’s.
Venture Capitals also act as strategic partners and mentors to the startups they invest in, as their returns are directly proportional to the growth of their investment portfolio (in Startups).
What is the need for existence of Venture Funds?
A question which pops up in the mind is that why do the VC’s exist despite of the existence of financial institutions and banks to fund early stage startups.
The answer to this question is pretty simple. Financial institutions and Banks are not inclined towards taking risky investments like investing in early stage startups. Moreover, finances by such institutions attracts high rate of interest and require security against the finances provided. There are certain scheme favouring startups and SME’s but are generally insufficient to fund the complete growth of a Startup.
This gap has resulted in the inception of venture fund industry. Venture funds purely exist to fill the void of risky investments needed by Startup to fuel their growth spurt. Venture funds are willing to take the risk to invest in promising Startups (without collaterals) against their equity stake, off course eyeing at a profitable exit.
FUELING THE GROWTH OF STARTUPS
Venture capital funds are essentially high-risk high reward investments which should be undertaken after a careful consideration of risk-reward potential. From the perspective of a Startup it makes sense to study the way ventures operate and assess your needs before accessing funds through a venture capital fund.
Corpzo has helped more various startups in achieving success for their ideas. We have grown to more than N employees in a short span of 3 years and continue to assist various startups and venture funds in managing their business.