Venture capital investments 101: Basics of VC Funding

Venture Capital is not something that we hear daily. It chiefly involves financing startups that have attained a certain level in terms of funding. Let's find out how they work, and what they do.

What is Venture Capital

Imagine this: you are a modern-day entrepreneur; you identified a problem. With your skills and knowledge, you have come up with a solution. Now you want to expand this as a business. Your billion-dollar idea looks workable on paper, numbers in the spreadsheet favour your business plan. But you are stranded, you lack the funds to start. Any business, irrespective of scale, requires capital. The idea can be revolutionary, but to make it work, sizeable capital must back you to start and scale. 

This is where Venture Capitalists play their part. 

Venture Capital

Venture Capital is a form of private equity. It finances small businesses, startups or even companies for proportional equity from them. VC firms use funds raised from private limited partnerships in the promise of investment in diversified companies for reasonable returns.

VC firms are companies that share less than 50% of the ownership of other private companies. They maintain a portfolio of companies they invest in and monitor. Apart from monetary benefits, there is a lot more they can do. They bring networks and other powerful resources to the table.

Venture Capital Investments

To invest, Venture Capitals (VC) raise money from large enterprises or high net worth individuals (HNIs) with private partnerships and form a pool of funds. These funds are then used to buy a minority stake in a potential startup. VC investments have a long history to track. Their operating knowledge and investing experience are as important as their monetary support. 

People working in venture capital are called Venture Capitalists. They have profound knowledge about the industry and the sectors of companies they look to invest in. They predict emerging trends and allocate funds in the right proportion.

Also Read 3 Ways You Can Start A Business When Faced With Low Capital Investment

Venture Capital Investing: How does it work?

Right from the idea, a startup's primary aim is to create value for its clients and investors through innovation. 

To understand how VC works, there are a few terms you should know.

Limited Partner

They form the topmost layers, limited partners are individuals who pool money. They are important for finalizing deals. But they will not interfere or influence where the money is invested and managed.  

General Partners

General partners handle any investment decisions, strategic planning, money management and fund allocation. They earn a commission for money management. GPs work for VC firms with their portfolio build-up as well. 

Venture Capital Investment Process

Companies go through different levels of investment right from idea to expansion. Let's see how VC plays a part in each of these stages. 

Seed Stage

In this stage, a startup is just in its inception. VCs provide a small amount of capital for business plan development, product development, and market research for equity. Seed rounds are important to kick-start a project.

Early Stage

Your business operations has begun and you are getting traction. You need more capital for development and operations. VCs finance a higher sum of money in this stage than in the seed stage. Funding usually happens in rounds namely series A, series B and so on. Early-stage funding is necessary to keep the company afloat.

Late Stage

Your company is established, growing at a tremendous pace, and revenue is soaring high. You are profitable or yet not. You might need more funds for expansion. VCs invest the highest sum as funding, namely in series D, and Series E rounds.

Where do VCs Invest?

In 2021 VC/PE funds invest a whopping $77.1 Billion in India, of which $28.5 Billion went to Indian Startups.3 The Indian startup ecosystem is growing at a solid phase, attracting VCs for more funds. So what's in there for them? 

Some common themes to attract VC investment are:

  • Consumer Technology (FoodTech, FinTech, EdTech)
  • Sustainable Energy (EVs, Charging stations, Batteries and Grids, SolarTech)
  • High growth startups 
  • Rapid Expansion with less Consumer Acquisition Cost (CAC)

VCs will assess your startup and have to burn down cash in the initial stages. If so, they will check for the sustainability of the business in the long run. They will invest to spend some cash in the early stages to enjoy profitability in the latter stages. Their primary aim is to expand and reach as many consumers as in the early stages for a price. They will have plans to turn profitable in the future. 

What do VCs look for before investment?

  • Viable business model 
  • Sectors for Growth 
  • Experience and previous success stories of founders
  • Adoption of technology 
  • Total market size and addressable market share. 

Money in the Game

Softbank is a popular VC firm led by Masayoshi Son based out of the Japan. It focuses on investment in high growth tech startups. Softbank is a company that owns companies. Over the years of successful investing, Softbank unveiled the vision fund, a plan to invest 100 Billion dollars in technological companies with a growth outlook for the future. Some of their successful startups include Flipkart, Lenskart, Byte Dance (parent company of TikTok), Cars24, InMobi and much more.

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