In return for the firm's equity capital, venture capital is a kind of investment or cash put in a company or a startup at different stages of development.
VC capital allows firms to expand into new markets (cities, nations), differentiate or diversify product lines based on their current stage of development, and much more.
In India, the year 2021 will be remembered as a watershed moment for venture capital investing. In 2021, Indian companies received a record $42 billion in investment across 1,583 transactions, setting a new high.
The year saw a total of 108 transactions totaling more than $100 million. Over the course of the year, 42 Indian businesses joined the unicorn club, bringing the overall number of unicorns to 86. With four more unicorns joining in 2022, India's unicorn club would have 90 unicorns.
Seed-stage fundraising in India surpassed $1 billion for the first time in 2021, with $1.1 billion in total capital and an average transaction size of $2.3 million.
Even on the IPO front, India witnessed the listing of 11 firms, including FSN- Ecommerce (Nykaa), Zomato, and PolicyBazaar, among others, which provide high-value exits to venture capitalists.
For VC investors, this tendency is both promising and reassuring. It suggests that the following year will be interesting in terms of venture capital investment for businesses. The rise in VC confidence may be seen in the creation of more than $6.2 billion in venture capital funds in India alone in 2021.
All of this activity bodes well for India's startup ecosystem, and venture capital will play a key part in the country's startup development.
We will explore venture capital as a source of investment for companies in this post, as well as how entrepreneurs should prepare to approach a VC company for funding.
What Is Venture Capital Funding and How Does It Work?
In return for the firm's equity capital, venture capital is a kind of investment or cash put in a company or a startup at different stages of development. Depending on the stage of the company, venture capital funds are used by startups for growth, scaling up, product development, and other purposes.
Venture capital businesses helped startups like Google, Facebook, and Apple grow into worldwide enterprises. With the help of venture capital funding, organisations like Paytm and Ola were able to achieve great scale in India.
What Are Venture Capital Firms and What Do They Do?
Venture capital companies, sometimes known as VC firms, are investment organisations that fund and advise early-stage to late-stage enterprises and startups. They invest in potential private enterprises after raising capital from limited partners. VC firms often invest in a business for a certain period of time.
The function of venture capital companies is most prominent in the second stage, when the company founders' unique concept need assistance in growing, scaling up, and becoming economically viable. Finally, the companies are sold to a large firm or listed as a stock IPO on a public market.
As a result, a venture capitalist invests in and supports an entrepreneur's concept for a period of time. The investor then departs with the aid of an investment banker, reaping a substantial profit that is seldom feasible with typical investment assets.
Why Should Startups Look for Venture Capital?
The capital markets' structure and restrictions make it difficult for a fresh company to get funds. To protect investors, regulations limit investment banks and public equity firms' working methods.
Banks only lend money to startups if they have physical assets, which startups do not have in today's information-driven economy. Because the risk of startup investment is significant, as is the mission of banks, venture capital financing serves as a form of haven for company entrepreneurs.
Characteristics of Venture Capital
• VCFs' most notable attribute is that they offer both seed and expansion-stage financing.
• VC financing is structured in such a way that venture capitalists often purchase an ownership position in a firm.
• VCFs lend the knowledge and expertise of investors to small firms, allowing them to expand up and prosper economically.
• VCFs assist in the development of new goods and services, as well as the acquisition of cutting-edge technology that will aid the company's further growth. • VCFs provide networking possibilities. The firm will expand very quickly with the help of powerful and rich investors.
• Venture capitalists invest in a number of fledgling businesses from various industries in the hopes that at least one of them would achieve huge growth and be rewarded with a significant payoff. This results in risk diversification.
The advantages of venture capital investment
• Business experience - Venture capitalists bring a wealth of knowledge, guidance, and industry contacts to the table. They are experienced specialists with in-depth knowledge of certain industry norms who can help your company avoid many of the drawbacks that come with starting a business.
• Additional resources and contacts - In addition to financial assistance, VCs may serve as HR advisors for startups. They are experts in finding the best employees for your company. This prevents the employment of the incorrect individual. Mentoring, partnerships, and skill training are among the numerous services it provides.
• Business growth - Venture capital helps a startup with the enormous sums of money it needs to grow. This kind of investment isn't achievable with bank loans or any other means.
• Better Management - Because venture investors own a share of the company's stock, they have a voice in how it's run. So, if you're not good at running a business, VCs can help you out a lot.
• Risk Aversion - Unlike a bank loan, where repayment is required, a promoter or founder of a business has no duty to return the initial financing. The venture capitalists accept the risk because they are confident in the company's future success.
Venture Capital Funding Stages
India's venture capital companies are investing from the very beginning, including seed rounds. Early-stage accelerators, which give seed capital to businesses, have been established by leading companies.
The phases of VC fundraising are as follows:
1. The pre-seed stage: Finalization of the product or service prototype; VCs are typically uninterested at this level.
2. The Seed Stage: The founders must construct a pitch deck and show to the VCs that the concept is feasible for development into a successful business from their own resources or angel investors, angel networks, and other sources.
3. Series A Funding: This is the initial round of venture capital investment, and it is at this time that venture capitalists get interested. The entrepreneurs must show their company's potential in terms of product mix and growth strategy.
4. Series B Funding: At this point, the business is ready to grow. The venture capital money helps with product development, marketing, and sales. Unlike Series A, when investors are looking for potential, investors in Series B are more concerned with results.
5. Series C Capital: When a firm is on a growth path, it receives Series C funding. Additional venture capital financing is necessary to create new goods and reach new markets, since the company strategy has been tried and proven.
Following this stage, venture capital investors hunt for a way out, either via sales or a public stock market listing.
What Is the Best Way To Get Venture Capital Funding In India?
Although the coaching, training, and support that come with venture capital investment may be very beneficial to business entrepreneurs, acquiring venture capital funding in India is far from simple. You need to understand how a venture capital business works as a startup entrepreneur.
Limited partners contribute money to a venture capital business, including:
1. general partners who handle the funds,
2. associates who manage the connection with entrepreneurs, and
3. analysts who find, analyse, and assess financing prospects.
Striking a successful deal with the appropriate VC investor requires excellent tactical expertise, thorough market research, and the ability to persuade the investor of your company's potential.
There are hundreds of active venture capital companies in India that support startups. Aside from domestic enterprises, a number of international venture capital firms have backed the Indian startup development narrative. The top 5 most active VC funds in India are shown below —
1. Sequoia Capital
2. Better Capital
3. Accel Partners
5. Tiger Global