Venture capital serves as an important source of funding for a wide variety of businesses, primarily those that want to scale up, of which, startups are the most common. In the rest of this article, we shall attempt to understand the workings and evolution of venture capital in India along with its features, benefits, and procedures. Further, we will look into how entrepreneurs can get in touch with venture capitalists and what they need to keep in mind while seeking this kind of funding.

Key Note #1: The Beginning of Venture Capital In India

The notion of venture capital in India emerged during the early 1980s when the government encouraged certain institutions, like IDBI, ICICI, and IFCI, to set up venture capital divisions within these organizations. These divisions were aimed at aiding the start-up of small firms which were unable to get financing through traditional methods. Getting loans usually requires a firm to possess some form of collateral in the form of tangible assets or cash flow to protect the lender from loss in case of default. Unfortunately, most new companies have little more than a concept. Understanding this problem, the government directed financial institutions to invest in these concepts and take equity in return rather than seeking collateral assets or cash.

Around the same time, the World Bank also provided funding through organized venturecapital arms like GVFL and Can Bank. Indian IT firms in the 90s and early 2000s received significant venture capital funding due to the business expansion of technology companies and new emerging business prospects.

Key Note #2: Importance of Venture Capital in Business Financing

Venture capitalists make equity investments in a company for various reasons, including:

Equity Purchase:

Venture capital firms usually invest money into a business through buying its shares and provide capital in return for ownership.

Financing Rapidly Growing Businesses:

Companies with unique products that are in urgent demand and are experiencing great growth receive a lot of investor interest to help them scale even more.

Funding in New Product Promotion:

Venture capitalists who are convinced that there is an existing market need at a certain point when a product is about or still in the development stage are willing to invest funds for creation and marketing of new products.

Creating Value Through Participation:

Unlike most investors that care solely about ROI, venture capitalists get involved on a deeper level with the companies they invest in. They already have years of experience which means that they already possess the abilities needed for strategic and operational decision-making.

Main Point #3: How Venture Capital Works

Venture capital firms gather money from different sources which include financial institutions, banks, corporates, high net worth individuals (HNWI), and in some cases, even pension funds. The funds are then invested into businesses which have a high potential for growth. In most cases, venture capital firms approach investors to raise capital, set up the investment vehicle as a trust or limited liability partnership (LLP), and then make investments from this fund into different ventures.

Main Point #4: Feature of Venture Capital

Below are the few features that define venture capital:

Long-Term Horizon:

Venture capitalists do not intend to get profits in the short run. They are investing for the long term, often ranges from 3 to 10 years. Their objective is to achieve business capital appreciation along with business expansion.

Low Liquidity:

Illiquid private company investments are not easily converted to cash. Unlike stocks that can be traded easily, venture capital investments are associated with companies not listed on stock exchanges which makes them harder to liquidate.

Highly Risked Capital:

Investment made at an idea stage or during early development phase of a company carries the highest risk of failure, therefore, venture capital financing is considered risky.

Financing is disbursed with a high degree of uncertainty.

Equity Ownership: Instead of only providing funds, venture capitalists seek ownership in the company as well. They usually become part of the board and have a say in the implementation of managerial policies.

Key Note #5: Benefits of Venture Capital

Long Term Equity Investment: Expansion with little or no pressure to repay the funds within a short time frame is one of the many benefits of venture capital financing. Companies are free to concentrate on growing the business.

Business Joint Venture: In addition to financial aid, venture capitalists assume the role of a business partner who contributes immeasurable value by offering their expertise, knowledge, and experience which can be used to aid other companies to grow by leaps and bounds.

Advisory Support: Venture capitalists can offer guidance on running a business owing to their experience in multiple industries. This includes integrating a company’s strategic goals with its operational plans in a way that acknowledges factors that may delay a company’s growth.

Large Network: Venture capitalists have vast networks throughout multiple domains including technology and finance. They are able to help businesses form relationships with prospective clients, customers, and other partners which can aid in business expansion.

Additional Financing: Venture capitalists are able to raise additional funds for a company needing more funds as it grows. They ensure, through their network, that additional capital is available to prospective companies and enable entrepreneurs to continually grow and receive support.

Experience in IPOs: As venture capitalists guide initial public offering (IPO) transactions, it is common for them to take public companies as clients. This serves many venture capitalists as an exit strategy since business shares can be listed on stock exchanges.

Trade Sale: In times of difficulty for a company, venture capitalists, within their extensive network, can guide an entity to sell the business to another entity, easing the process of a trade sale.

Golden Statement: The Value of Equity Spending money on buying shares can yield high gains.

Having equity can often be very expensive for companies, such as Wipro. In 1981, Wipro traded equity shares worth Rs. 10,000 and as of now those shares are approximately worth Rs. 750 crore. This shows that even though equity is expensive, it can return a substantial value as time goes by. The secret lies in selling the equity judiciously and having the right mix of venture capitalists who can steer the company to success.

Conclusion

Entrepreneurs have a unique way to expand their businesses through venture capital. However, they also come with problems of their own. Before even looking for venture capital funds, figuring out how it works, and how a venture fund functions along with its pros is crucial. Carefully thinking about the stage your business is at, and if you are ready for this type of investment is up to the entrepreneur. The right investors can be met while networking with venture capitalists or attending events. Have a well laid venture capital funding plan that incorporates strategic approaches to tackle potential investors, improve likelihood of success.