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
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
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
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
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.
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
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
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.
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.
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.
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
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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