Venture Capital Funding: Meaning, Benefits, types and “How Venture Capital fund functions?”

Introduction

A startup or firm may get venture capital as a source of finance at different phases of development in exchange for equity in the business. In this article, we will talk about the Benefits for Venture Capital funding, types of venture capital funding in India for Startups and “How a venture capital fund functions?”

Meaning of Venture Capital Funding

Venture Capital Funds (VCF) are investment funds that assist investors seeking private equities in startups, small and mid-sized businesses with strong growth potential by managing their money. VCF are institutions dedicated to funding new ventures and are governed by the Securities and Exchange Board of India’s guidelines (SEBI). Despite the high risk of funding new projects, investors are eager to do so because they anticipate high returns on investment.

Venture Capital Funds ensure that investors’ money is used to fund projects with growth potential, and the money provided in the process is known as Venture Capital. Venture capital funds are distributed based on the assets, size, and stage of product development of the company. These firms are said to have high-risk/high-return profiles because they are typically start-ups or small in size.

Benefits for Venture Capital funding in India for Startups

• Investors have expertise that emerging entrepreneurs can greatly benefit from. Venture Capital is a great way to generate capital at the early stages of a business.
• Venture Capital funding investors can also assist in providing new networking and collaboration opportunities.
• Risk management becomes less difficult.
• The addition of venture capital funding increases exposure to other potential markets.

How a venture capital fund functions?

Venture capital investments can be classified as early-stage capital, seed capital, or expansion-stage financing based on the maturity of the business at the time of investment. However, the stage of investment has no bearing on how venture capital funds operate.

To begin with, venture capital funds (like all other funds) must raise funds before making any investments. Potential investors are given a prospectus for the fund before committing funds. Following a commitment, the fund’s operators contact all potential investors to finalise individual investment amounts.

Following that, the venture capital fund seeks private equity investments that have the potential to generate positive returns for its investors. This process involves the fund’s manager or managers reviewing hundreds of business plans in search of potentially high-growth companies. Fund managers make investment decisions based on the prospectus and the expectations of the investors. Once an investment is made, the fund will charge an annual management fee of around 2%.

When a venture capital fund’s portfolio company exits, investors earn returns through a merger and acquisition or an IPO. In addition to the annual management fee, the fund will keep a percentage of the profits if the investment is profitable.

Types of venture capital funding in India for Startups

1. Early Stage Capital

You have gotten your company off the ground, have a management team in place, and sales are increasing two to three years into your venture. At this stage, VC funding could assist you in increasing sales to the break-even point, improving productivity, or increasing the efficiency of your company.

2. Seed Capital

If you are just getting started and do not yet have a product or an organized company, you will be looking for seed capital. Few VCs invest at this stage, and the amount invested is likely to be small. Investment capital could be used to develop a test product, fund market research, or cover administrative costs.

3. Bridge Financing

You may also be looking for a partner to assist you in locating a merger or acquisition opportunity, or you maybe seeking public funding through a stock offering. There are venture capitalists (VCs) who specialise in Initial Public Offerings (IPOs), buyouts, and recapitalizations. If you’re planning an IPO, a venture capitalist may be able to help with mezzanine or bridge financing, which is short-term financing that allows you to cover the costs of going public.

4. Startup Capital

At this point, your company would have a working sample product and at least one principal working full-time. Funding at this stage is also uncommon. It typically includes the recruitment of additional key management, additional market research, and the finalization of the product or service for market introduction.

5. Late stage capital

Your company has impressive sales and revenue at this point, and you have a second level of management in place. You maybe looking for funds to expand capacity, increase marketing, or increase working capital.

6. Expansion Capital

Your company is well-established, and you are now looking for a venture capitalist to help you take it to the next level of growth. Funding at this stage may assist you in entering new markets or expanding your marketing efforts. You should look for VCs who specialize in later-stage investments.

Summing Up

Many wealthy individuals and venture capital firms are eager to invest in innovative new projects. These high-net-worth individuals are commonly referred to as “Angel Investors.” If you are a budding entrepreneur looking to start a company or raise funds for your business, you will face numerous challenges, due to which it is important to figure it out about how to acquire fund for your company before its incorporation.