Venture capitalist is also known as VC. VC is someone who works at a venture firm and invest in startups or companies with high growth potential.
Venture capital is a big part of any startup ecosystem they invest anything from around a million all the way up to hundreds of millions of dollars in 2017 alone 84 billion dollars was invested in venture capital in US alone.
Venture capitalist invest all the way from early stage to very late stage were talking seed all the way up to an IPO.
what’s in it for me ?
- Where the money comes from
- Venture capital investment process
- Famous VC backed business
- Some active VC firms in India
- Conclusion
- Faq
Where the money comes from
Venture capitalist doesn’t invest their own money. They invest other people’s money we get to the venture fund there’s something called LPS Limited partners that’s where the money comes from. So, the money that ends up being invested in a Startup comes from these Limited partners.
These are investors that would like to invest in venture but don’t want to manage the investment. So they put them in a venture fund instead typical LPS are pension funds, family officers, insurance, companies etc.
So, all this money goes into the venture fund from the LPS but that’s not the same as a venture firm in order to make all the actual investment. We need a venture firm. The venture firm manages the fund and makes all the investments.
The venture firm gets paid an entire fund usually the management fee of percentage of the entire fund usually the management fee is around 1 to 2.5 % of the total fund every single year this means the firm clearly has an interest in raising a lot of money because they get the management fee based on that.
Also read – Private equity fund
Venture capital investment process
It has various steps in this process
- Deal origination
- screening
- Due diligence
- Deal structure
- Post investment activity
- Exit plan
Deal origination
Venture capitalist mostly operated through intermediaries, of course, they also have their direct employees but in most of the cases they operate through intermediaries, and in many circumstances practicing CA will be working as intermediaries through them.
Venture capitalist will source the deals but before sourcing the deal, venture capital will inform the intermediaries as to where they should focus, because not all deals brought can be accepted by venture capitalist.
They will give focus like sector focus, business stages, promoter focus, turnover focus after that the company which identifies as deal should give a detailed business plan and that should have business model, financial plan or exit plan and all this will cover in the document name IM.
Screening
Once the deal is confirmed it will send for the screening by the VC and it will have done by committee formed by senior level people.
Once screening will done, it will select that company for further process and it is possible that they will reject that company also if screening turn to be positive then they go for next step.
Due Diligence
If the VC will verify the velocity of the document that has been submitted and this is generally done by external bodies or mostly it will do by consultancies and the fees of diligence is generally paid by VC but in many cases it is share between the VC and company.
Deal structuring
In this step, the deal will be structure in such a way that both the parties will benefit that why we say it win-win and in many cases of convertible structure will be brought in order to ensure that the promoter retains the right to buy back the shares and in many structures to facilitate the exit the venture capitalist also put the condition that promotors should sell part of Stake along with the venture capitalist and that condition is called as TAG ALONG.
Post investment activity
Venture capitalist appoints his nominee in the board of director and he will lay out certain guidelines. It means venture capitalist expecting the company to have a strong management information system, strong budgeting, and strong corporate governance.
Company is expected to update the venture capital about the progress they are making, about the milestones and if there are any deviation in achieving those milestones. They have to explain the reason to VC why they could not achieve.
Exit plan of venture capitalist
Exit plan is in two ways
Sell third parties
In this VC can sell their shares to third parties through as IPO or throw as private placement to another VC itself.
Promoter by back commitment
In this the company buy the share from VC at a pre agreed rate and generally it would be in the IRR range of 18% to 25%.
If exit does not take place i.e. if VC could not sell the shares through IP or to some other private placement, then promoters are expected to buy back. In many cases promoters are given the first right of buy back it means promoters are going to get back their shares and they have control or right over the entire shares of the company.
Famous Venture Capitalist backed business
- Wework
- SpaceX
- Airbnb
- Unity
- Coinbase
Some active VC firms in India
Conclusion
Therefore venture capitalist is one of the important source of capital in business not for the finance they will guide the young startup in all their aspect ranging from guiding the growth financially and making their step strong into the financial market This is the whole essential procedure needed steps to get funding by venture capitalist that can be done alone without any help easily and will be less time taken process.
FAQ
Venture capitalist is also known as VC. VC is someone who works at a venture firm and invest in startups or companies with high growth potential.
We can find Venture capitalist online on their official websites
Venture capital funds are investment funds that manage the money of investors who seek private equity stakes in startup and small- to medium-sized enterprises with strong growth potential
yes venture capitalist a private equity
Hi I’m Gurpreet singh, Engineer turned Digital Marketer | Entrepreneur |Mechanical Engineer|Visit gurpreetchawla.in
