A Beginner’s Guide to Venture Capitalists

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Venture capitalists are well-heeled investors that often invest their capital in businesses with indelible growth opportunities. The infused capital is called venture capital. 

“One of the cautionary lessons of VC is, if you don’t invest on the basis of serious flaws, you don’t invest in most of the big winners.” 

―Marc Andreessen

When an entrepreneur initiates a project to seek, develop and validate a scalable business model to fruition, it becomes a start-up. They also refer to new businesses that intend to grow beyond the tag of a founder, have employees, and rise. 

But amidst all the hype and hoopla of being the boss and running your own company, a start-up needs money to kickstart. 

Know how to register a startup in India.

So what do you do? You pitch your idea to certain people who remain behind the screen– decision-makers and risk-takers, who validate your business model. They are Venture Capitalists (VCs).

Who are venture capitalists

Definition: Well-heeled investors often invest their capital in businesses with indelible growth opportunities. The infused capital is called venture capital, and the investors are known as VCs. 

By nature, VCs sail with risky investments or new businesses, which is adequate to hand-out high returns if they figure out the right venture. 

Or there’s also an amount of risk substantial enough to scare off banks! 

To ensure the money is well spent, VCs have the authority to leverage crucial decisions of the companies they are investing in.

Understanding venture capitalists

VCs are usually composed as limited partnerships where partners invest in the VC fund. It constitutes of a committee that is responsible for making investment decisions. 

Here’s an icebreaker: In contrary to popular opinion, VCs do not fund start-ups from the beginning. They often look for a strong management team and review the potential market, and unequalled products or services with a robust vying edge.

Most VCs also give preference to industries that they are familiar with.

After identifying the emerging and favourable companies, the assigned capital is distributed to fund the start-ups in exchange for a substantial stake of equity for a significant return on investment (ROI). 

Later, the quintessential VC investment takes place after an initial ‘Seed Funding’ round, which is called the Series A round.   

The VCs provide this financing option in the interest of achieving a return through an eventual ‘Exit’ event. 

Some of the well known VCs include Chriss Sacca, Twitter and Uber; Peter Theil, the co-founder of PayPal, Jeremy Levine, Facebook and Pinterest. 

Not to be confused with Angel Investors, also known as business angels–individuals who invest their wealth in a start-up. Whereas VCs are a group of financial specialists or organisations. 

Let’s dig deeper!

Difference between angel investors and VCs

Knowing the distinction between angel investors and venture capital investors is necessary to make the right decision for your business going forward. 

 

VCs

Angel Investors

VCs are part of an organisation  Angel investors work alone
Investment can range from a few million to tens of millions Limited financial capabilities 
Comparatively less risky  Uncertain revenue stream 
Depends on the focus of the firm and growth companies  Invests in pre-revenue business
Type of investment is through equity or convertible debt  Type of investment is through equity or SAFE  

Government regulations on funding from VCs

Yes, VCs and angel investors cover essential measure to support growth-stage startups, but there are government regulations that one must abide.  

Securities and Exchange Board of India (SEBI) is the regulatory body for VC firms or funds. Here are some of the amended regulations: 

  • The minimum investment should not be less than Rs. 5 lakhs 
  • Also, the minimum corpus of the fund should be at least Rs. Five crores
  • VCs who want to benefit under the relevant provisions of the Income Tax Act will be required to divest from the investment within one year
  • The venture capital fund will be eligible to participate in the IPO through book building route as a qualified institutional buyer 
  • SEBI removed the mandatory exit requirement by VCs to seek tax pass-through
  • The automatic exemption was granted from the applicability of open offer requirements

Know more about the tax incentives and exemptions to startups in India.

Conclusion

Because investments are illiquid and require a prolonged time frame to harvest, VCs are expected to carry out detailed due diligence before investing. They are also expected to nurture the companies in which they invest. 

In other words: “Start-up Financing is not just about raising funds, it is a holistic process that involves proper business planning with thoughtful growth targets, deciding business valuation as per the current market standards, planning potential exit options for investors,”

― Nucleus Partners

Also read: Income Tax Rules for Startups