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Venture Capital : Hope for Startups

Indian Startup Chamber

  • April 16, 2020
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Invention and innovation leads the Startups towards success. The success stories of Startips in India has been well known in entire world, since the Startup India mission was launched by Hon'ble Prime Minister of India, Mr. Narendra Damodardas Modi. In these sagas, founder of Startups is the modern-day cowboy, roaming around the investors for scaling their business. On the other side, venture capitalist who are ready to help the startups through all tight spots -in exchange, of course, for a piece of the action.


What is Venture Capital?

Venture Capital is a form of private equity or a type of financing provided by investors to early stage start up companies and small businesses with huge potential to grow. The people who invest this money are called venture capitalists (VCs). The new ventures are having the uncertain outcome and has high risk.

Venture Capital investments are risky as they are illiquid, but on the other side are capable of giving higher returns if invested in the right venture. The returns to the venture capitalists depend on number of the factors such as Founders strategy, scalability of business, future growth of the company etc.

Venture money is a short term money. The idea is to invest in a company’s balance sheet and infrastructure until it reaches a sufficient size and credibility so that it can be sold to a corporation or so that the institutional public-equity markets can step in and provide liquidity.

Investors invested in the idea of founders, curate the startups, nurtures it for a short period of time, and then exits with the help of an investment banker.

Venture Capital is the most suitable option for funding a costly capital source for Startups / MSMEs and most for businesses having large up-front capital requirements which have no other cheap alternatives.

Venture capital mainly comes from well-off investors, investment banks and any other financial institutions. However it’s not always provided in monetary form; it also can be provided in the form of technical or managerial efficiency.

Venture capital is usually allocated to small companies with exceptional growth possibilities, or to companies that have grown rapidly and appear self possessed to continue to expand.

For new ventures that have a limited operating history (below two years), venture capital funding is progressively becoming a well-liked source for raising capital, particularly if they’re lacking access to capital markets, bank loans or other debt instruments.


The Venture Capital Process

The foremost step for any business looking for venture capital is to submit a business plan, either to a venture capital firm or to an angel investor. If the firm or the investor is interested in the proposal, then they’re going to perform due diligence, which includes a thorough investigation of the company's business model, products, management, and operating history among other things. Background research is additionally vital because venture capital tends to invest larger amounts in fewer companies.

Many venture capital professionals have had prior investment experience, often as equity research analysts; others have a Master in Business Administration (MBA) degrees. Venture capital professionals also tend to concentrate in a specific industry. 

Once due diligence has been accomplished, the firm or the investor will pledge an investment of capital in exchange for equity in the company. 

The firm or investor then starts a lively role within the funded company. They start advising and monitoring its progress before releasing additional funds. The investor exits the company after a period of time, typically four to six years after the initial investment, by initiating a merger, acquisition or initial public offering (IPO).


Venture Capitalist

A venture capitalist is a private equity investor that provides capital to companies presenting high growth potential in exchange for an equity stake. 

This could be funding Start-up to equity markets. Venture capitalists are willing to risk investing in such companies because they can earn a massive return on their investments if these companies will be successful. 

Venture capitalists are usually formed as limited partnerships where the partners invest in the Venture Capital fund. The fund normally features a committee that is tasked with making investment decisions. 

They seek to focus on the firms that are at the stage where they are looking to commercialize their idea. The VC fund will buy a stake in these firms, nurture their growth and look to Return on Investment. Venture capitalists have the power to influence major decisions of the companies as they are investment are in stake.

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