VENTURE CAPITAL: A FINANCE DRIVER FOR START UP IN INDIA

Venture Capital is a Sort of Private Equity or a Form of Financing that is Provided by firms to emerging firms that are deemed to have high growth potential and esteemed growth for the future. Venture capitalists normally focuses on the new companies with limited business operations that are too small to raise and issue their capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering.

 A venture capitalist is a person who invests in a business venture, providing capital for start-up or expansion. However, Individual venture capitalists are the majority of venture capital (VC) comes from professionally-managed public or private firms. Their business is to pool investment funds and find and invest in businesses that are going to provide their investors high rates of return.

Venture capitalist in return get a significant control over major or strategic business decisions and ownership

Venture capital can heed towards success to the private public alliance which in turn creates a well driven business model of systematic business network for the firms and industries for their progress and development and the ultimate nation building.

Venture capital firms obtain investment capital by pooling money from pension funds, insurance companies, and wealthy investors

PROCESS OF RAISING FUND VIA VENTURE CAPITAL OR VENTURE FINANCING:-

Start up company has brings out a new product to the market requires funds. However there are several ways to attract funding like family funding, loans from friends, personal bank loans etc but for more ambitious projects, some companies need more than what is mentioned and therein comes the point of venture funding by the venture capitalist firms who are specialised in financing new venture against lucrative return

THE VENTURE CAPITAL PROCESS

The first 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 interested in the proposal, the firm or the investor must then perform due diligence, which includes a thorough investigation of the company’s business model, products, management and operating history, among other things.

Once due diligence has been completed, the firm or the investor will pledge an investment of capital in exchange for equity in the company. These funds may be provided all at once, but more typically the capital is provided in rounds. The firm or investor then takes an active role in the funded company, advising and monitoring its progress before releasing additional funds.

There are Five Common stages of parlance of venture capital financing:-

Seed Stage

Start up stage

Second stage

Third stage

Bridge stage or Initial Public Offering Stage

The number and types of stages may be extended by the Venture Capital firm if it deems necessary .It may happen if the venture does not perform as expected due to bad management or market conditions.

SEED STAGE:- It is considered as the setup stage where a person or a venture approaches with his conceived idea about the project for funding of their product or idea. During this stage, the person or venture has to convince the investor why the idea/product is worthwhile. The investor will investigate into the technical and the economical feasibility of the idea. In some cases, there is some sort of prototype of the idea/product that is not fully developed or tested.

If the idea is not feasible at this stage, and the investor does not see any potential in the idea/product, the investor will not consider financing the idea. However, if the idea/product is not directly feasible, but part of the idea is worthy of further investigation, the investor may invest some time and money in it for further investigation.

Risk is the vital part of this stage as the risk of losing the investment is tremendously high because there are so many uncertain factors. The market research may reveal that there is no demand for the product or service or it may reveal that there are already established companies serving this demand.

START-UP STAGE:- If the idea/product/process is qualified for further investigation and/or investment, the process will go to the second stage. In this stage if the start up firm is able to persuade the investor to foresee some sort of potential in it then the investor initiates the further process in this regard by forming management team, board of directors and then does market research to see if the product is feasible in the market and attracts a demand for the same in the minds of the prospective customers then the project goes to the third stage.

SECOND STAGE:- At this stage, we presume that the idea has been transformed into a product and is being produced and sold. This is the first encounter with the rest of the market, the competitions. The venture is trying to squeeze between the rest and it tries to get some market share from the competitors. This is one of the main goals at this stage. Another important point is the cost. The venture is trying to minimise their losses in order to reach the break even. The management team has to handle very decisively.

The VC firm monitors the management capability of the team. This consists of how the management team manages the development process of the product and how they react to competition.

If at this stage the management team is proven their capability of standing hold against the competition, the VC firm will probably give a go for the next stage.

However, if the the management team lacks in managing the company or does not succeed in competing with the competitors, the VC firm may suggest for restructuring of the management team and extend the stage by redoing the stage again. In case the venture is doing tremendously bad whether it is caused by the management team or from competition, the investor will cut the funding.

THIRD STAGE:- This stage is seen as the expansion/maturity phase of the previous stage. The venture tries to expand the market share they gained in the previous stage. This can be done by selling more amount of the product and having a good marketing campaign.

 Also, the venture will have to see whether it is possible to cut down their production cost or restructure the internal process. This can become more visible by doing a SWOT. It is used to figure out the strength, weakness, opportunity and the threat the venture is facing and how to deal with it.

Apart from expanding, the venture also starts to investigate follow-up products and services. In some cases, the venture also investigates how to expand the life-cycle of the existing product/service.

At this stage the VC firm monitors the objectives already mentioned in the second stage and also the new objective mentioned at this stage. The VC firm will evaluate if the management team has made the expected cost reduction. They also want to know how the venture competes against the competitors. The new developed follow-up product will be evaluated to see if there is any potential.

BRIDGE/PRE IPO STAGE:- This is the last stage of the venture capital financing process. The main goal of this stage is for the venture to go public so that investors can exit the venture with a profit commensurate with the risk they have taken.

Internally, the venture has to examine where the product’s market position and, if possible, reposition it to attract new market segmentation and penetration. This is also the phase to introduce the follow-up product/services to attract new clients and markets.

Ventures have occasionally made a very successful initial market impact and been able to move from the third stage directly to the exit stage. In these cases, however, it is unlikely that they will achieve the benchmarks set by the VC firm.

Conclusion:-

Considering the high risk involved in the venture capital investments complimenting the high returns expected, one should do a thorough study of the project being considered, weighing the risk return ration expected which gives an insight about the project under review. One needs to do the homework both on the Venture Capital being targeted and on the business requirements for better execution.

Disclaimer: – This is only a knowledge sharing initiative and author does not intend to solicit any business or profession. I assume no responsibility for the consequences of use of such information.

CS Tanuj Saxena

is a Qualified Company Secretary from Lucknow having a rich and Core expertise in Secretarial compliances of Companies, Nclt matters and Corporate Litigation matters.

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