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Introduction to Venture Capital

In finance world, other than Banks, brokerage firms, insurance companies, etc. there are other institutions also which plays very important role in financial market, especially equity related issue. One of them is Venture capital-

Many of the International and Indian well settled companies such as Google, Facebook, Microsoft, Oyo, Ola cab, etc. have been funded by Venture Capital in their earlier stages. India's start-up and VC ecosystems keep on to flourish as investors take a long-term perspective depends on country's high growth potential. For that reason in spite of 2019 being a year of global economic slowdown, Indian VC industries thrived with $10 billion, highest ever capital deployment.

Definition & Meaning
Venture capital is, well, the kind of capital which has been, is or will be invested in a venture. Widely known literal meaning of venture is a project which involve risk, risk in the sense of outcome. As ventures are young innovative projects which although have potential to grow but involves lots of uncertainty in its outcome.

Now, the contextual meaning of venture capital is investment made by wealthy investors or businessman, with a view to get manifold profits, in any start-up company having high chances to extend, flourish and to make good turnover. And the investors who invest in these newly started innovative companies are known as venture capitalists. In return for investing, the venture capitalists become a major share- holder in the start- up company and seats as members of boards of directors.

With proper backing and cooperation intervention and assistance, by its members of boards of directors, VC firms take measures to increase the chances of success of a new firm. The VC process is complete when the company is sold through either listing on the stock market or is merged in /acquired by another firm, or when the startup cannot perform the way it was idealized.

One thing should be made clear that venture capitalists do not invest equity in start-ups from their pockets. VC firms invest out of funds they collect from limited partners and different interested wealthy businessman. Thus, the funds raised via exits therein are then returned to the respective fund-holders while the surplus is collected by the VC firm as profit and the investment cycle brings up to date.

Scope of Venture Capital
Venture capital has very wide scope in present time and in future, especially in developing nation as India. We have the technology at hand to us to ensure the proper management of our daily lives and the sharing of valuable information with our friends, families, colleagues and more. The development of new technologies helps to save many lives; it improves the quality of life and work and makes the world more livable.

Counties with increasing population demands for employment generation as the same pace and money in the hand of middle class people demands for newer and faster technologies. For more such technologies to come to surface; to turn more ideas into reality; to make more innovation reach to us and to generate large scale employment new startups and new industries are being set up in the country. These start-ups and new industries need capital to grow and expand their business.

For this purpose, venture capital came into picture to provide innovators a hand of trust in the form of equity. The role of venture capital investment is increasing day by day. Year 2019 was the most active in terms of venture capital investment.

There is an increased global awareness that a modern economy cannot reach its full potential without bringing up the innovation of its entrepreneurs, and this realization intensify the prospects for venture capital. For the time being, the Indian government brings in several regulatory programs to boost the Indian start-up ecosystem.

Flagship programs such as Startup India, Digital India and the Alternative Investment Policy Advisory Committee continue to enhance the economic environment for start-ups and investors as well. India's ranking on the World Bank's ease of doing business index also increased remarkably from 130 in 2016 to 63 in 2019, enhancing investor confidence in the administrative ecosystem.

Features of Venture Capital
Following are some features of venture capital

High risk Investment
Results of investment are always uncertain. Uncertainly increases because of the fact that VCs invest in start-ups which have no track record of success and even no experience in business field. As the objectives of venture capital firms are to make higher returns, they follow the rule, more is the risk involved, more is the profit.

High-Tech Project
In general, venture capital investments are made in high tech and futuristic projects or areas using new technologies as these projects provide higher chances of manifold returns.

Length of Investment
Unlike, publicly traded investment instruments, VC investments do not make choice of a short-term payout. Venture capital investments are generally long term investment, of almost three to seven years or more. As venture capitalists seek for significant returns of their investment, they use their talent and business skill to help the startup to expend and make more profits so that they can eventually exit up with more profits.

Illiquid Investment
When a company's securities are illiquid, it means that investors cannot sell the securities they possess in that business to receive their money out of the investment (even at a loss) at any moment they want to. Venture capital is an investment that is not subject to refund at the behest or a repayment schedule.

Need for a venture Capital
For startups

When a person come up with an innovative idea, he/she needs capital to enforce that idea and turn it into a commercial feasible project. Venture capital provide a way to startups to achieve successfully by giving them required capital, better management and valuable business advise though its members of boards of directors.

For Expansion of a company
Venture capital provides huge financing that a company needs to expand its business. Venture capital provides huge financing that a company needs to expand its business. Venture capital have ability to make it possible for startups to expand their business that would not be possible through bank loans or other methods.

Expertise joining the company
Venture capitalists provide valuable advice, industry interconnections and other facilities. These experts have mastery over the specific market standards and they can help a start-up company to avoid its business from many disadvantages that are generally associated with startups.

Better management
It is not without exception that being an entrepreneur one is also a good business manager. However, considering that Venture Capitalists hold a percentage of equity in the business, they will have the power to say in the management of the company. So if an innovator is not that good at managing the business, this is a remarkable advantage.

Role of Lawyers in Venture Capital
VC have some basic legal need such as due diligence, drafting legal agreement, negotiating investment terms and conditions and also representing VC's interest sometimes which is being fulfilled by business law attorneys.

Earlier only big VC firm have having billions of assets employ legal experts but now because of complex regulation and management of company, almost every VC firm including medium and small firms hire legal officers to handle these issue, so that they can better focus on business side of company rather than on legal minutiae. Before investing in a start-up VC firms had to make some due diligence process to such an extent that there should be no hindrance in making manifold returns out of their investment.

Drafting Contract
While it is not mandatory to draft a contract to make it enforceable by law but it is advisable to draft contract as it ensure that all the terms and condition are documented for future reference. For this purpose VCs need lawyers.

Apart from drafting contracts, legal officers in VC firms also have to review the terms and conditions of the contracts, which startups has executed with others such as customers, vendors, insurance company, etc. in order to get a clearer picture of their working and obligations. This practice of lawyers helps VC firms to make better negotiations.

Intellectual Property
Venture capital investors search for vigorous start-ups with innovative products and pioneering and revolutionary technologies that can endure competitive advantage on the market and have a high business potential. Enduring competitive advantage of innovative products or services is possible only, if these products or services are protected with intellectual property rights. Here, role of the VC lawyer is to conduct diligence process so that to confirm, the start-up in which VC firm is going to invest does not infringe any third party intellectual property rights.

Litigation attorneys are also very important for the venture capital firms. Whenever any VC firm sued or they has to sue one or other investors or startup itself they need litigation attorneys to handle these issue. There are also sometimes a clause in VC- startups agreements that VC firm can sue upon the failure of the start-up, at that time also VC firms needed litigation attorney to enforce that clause.

Startups companies play key role in nation's prosperity and economic well-being. Venture Capital is very crucial for any startup to grow. It ensures the proper availability of equity for the startups. Besides being a key player in startups growth and expansion there are also some ill effects venture capital investment which sometimes can be detrimental to the health of startups.

Venture Capitalist provides a huge support to the young innovative high potential companies in the form of equity investment and management support. Their long term goal is to make the startup able to give good turnover so that at the end they could withdraw holding profits in their hand. Having this perspective venture capitalists in turn seek some stakes in the startup company proportionate to their investment. This as a result may sometimes leads startups to have very little say in their own company.

One thing is popularly known that nothing can hundred percent good or evil. Same applies to venture capital also. Although, there are some flaws in venture capital investment, it is highly recommended to have venture capital investments to ensure economic health of the country. And thus to allure more VC investments counties are easing regulatory compliance. India is no exception to this Start up India has launched in 2015 since then it is noted that till February 2018, 6,981 startups have been registered by the DIPP and thus attracting large amount venture capital fund.

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