India is full of talented budding entrepreneurs who have innovative ideas for starting a business. To implement their ideas they need certain minimum amount of capital for investment and generally they have to seek different alternatives for investment unless their family is supportive enough. Start ups are usually small enough to raise money from market and are also not in a position to secure a bank loan, in such cases venture capitalists come to rescue. Venture capitalists invest in such growing companies and make money by owning equity in these companies. When a company is started and funds required are not very huge then usually entrepreneurs go for angel investor, funding at this level is called as seed funding. Correspondingly if the funds required for investment are huge, then Venture capitalists can be approached.
What is a Venture Capitalist?
Venture capitalist is an investment firm structured as partnerships which pools money from investors and then further invest it in different growing companies which need investment as well as guidance. They have small teams of scientists, researchers, Business analysts with a lot of industry experience who study the proposals and try to identify the potential company which has a good probability to rise in future. After selecting a company for investment, they make money through the profits earned and guide the organization to reach new heights. They charge investors 2% of committed capital for investment operations and refer it as management fees and in addition they charge a carried interest which is 20% share of the profits of the fund, while remaining 80% goes back to investors.
What do they require in a company?
The important things they seek in a company which they consider necessary for investment are
A dynamic Business plan: The entrepreneurs should be confident of their ideas and their implementation. The business plan should be able to communicate its feasibility, high rate of return, uniqueness. It should clearly define goals, objectives, and strategies to be followed. Market analysis, marketing plan, operations and projected financial statements for next five years should also be made a part of it.
A strong management team: To implement the ideas, a set of determined, experienced, innovative, practical, knowledgeable and wise people are required to form management team who have the ability to take the company forward.VC look for quality and understanding level in management team and whether it has the ability to grow and expand with company’s growth.
Investment structure: Since their main concern is whether the company will be able to generate enough return to recover their investment so they lay emphasis on projected financial plans, financial statements. They want to make sure that each penny they provide is being invested for making more profits.
A unique product and growing market: Is the product being offered unique and beneficial enough to attract customers. Does it have the patent rights to create a barrier for other players? Will it be able to create a position in market? They also consider the targeted customer segment, the competition which exists and the scope of market growth.
Exit strategy: This is one of the most important things amongst all. Can the company grow at a faster rate in a short time and go for an IPO or can it become an attractive acquisition target? They want to know clearly how they can realize liquidity and recover their investment.
The venture capital fund has a life time of around 9-10 years. Initial 3-4 years are used for investing while the remaining years are used to manage funds efficiently and take the company to new heights until it leads to a good exit strategy. For different industrial sectors there are corresponding types of VC firms.VC firms help in raising employment level and GDP of the country. In India there is a member based organization called Indian Private Equity and Venture Capitalist Association (IVCA) which represents a group of equity firms, VC firms and supports investment in growing companies. More information on VC can be gathered from their website.
On the other hand if we look on entrepreneurs side while going for a VC:
1. He should be clear about his ideas and the way they have to be implemented and he should be able to convey them elegantly.
2. He should research for different Venture capitalist firms in that particular industry, gather information about their interests, reputation in market, and which stage of funding is preferred by them.
3. After selecting the appropriate VC he should approach the firm with a sound business plan, strong management team and an assuring exit strategy.
4. He should always be prepared to go for alternatives if the VC rejects their proposal.
Indian entrepreneurs have enough potential to change the economic state of the nation. But sadly the talent is not directed properly and sometimes just gets lost in the crowed.