What is venture capital?

Venture capital is financing that’s invested in startups and small businesses that are usually high
risk, but also have the potential for exponential growth.
The goal of a venture capital investment is a very high return for the venture capital firm, usually
in the form of an acquisition of the startup or an IPO.
Why would you want to use venture capital?
Venture capital is a great option for startups that are looking to scale big — and quickly. Because
the investments are fairly large, your startup has to be prepared to take that money and grow.
Advantages of working with venture capitalist firms
The biggest advantage of working with venture capital firms is that if your startup goes under —
as most do — you’re not on the hook for the money because unlike a loan, there’s no obligation
to pay it back.
Venture capitalists come to the table with a lot of business and institutional knowledge. They’re
also well-connected with other businesses that could help you and your startups, professionals
that you might want to take on as employees, and — obviously — other investors.
Disadvantages of working with venture capitalist firms
While you don’t technically have to “pay back” venture capital, venture capital firms are
expecting a return on their investment.
That means that a startup that accepts VC money needs to be planning for an exit of some kind,
usually an acquisition or an IPO. If that’s not your goal — or if you see yourself running your
startup forever — then venture capital is not for you.
On that note, part of what venture capitalists want in return for their investment is equity in a
startup. That means that you give up part of their ownership when you bring on venture capital.
Depending on the deal, a VC may even end up with a majority share — more than 50 percent
ownerships — of a startup. If that happens, you essentially lose management control of your
company.
How does venture capital work?
A venture capital firm is usually run by a handful of partners who have raised a large sum of
money from a group of limited partners (LPs) to invest on their behalf.
The LPs are typically large institutions, like a State Teachers Retirement System or a university
who are using the services of the VC to help generate big returns on their money.
The partners have a window of 7 to 10 years with which to make investments, and more
importantly, generate a big return. Creating a big return in such a short span of time means that
VCs must invest in deals that have a giant outcome.
These big outcomes not only provide great returns to the fund, they also help cover the losses of
the high number of failures that high risk investing attracts.
What types of venture capital are there?
The different types of venture capital are based on the stage the startup is in.
1. Early stage funding
Early stage funding includes seed funding and Series A.
The very first money that many enterprises raise — whether they go on to raise a Series A or not
— is seed funding. (Some startups may raise pre-seed funding in order to get them to the point
where they can raise a traditional seed round, but not every company does that.)
The name is pretty self explanatory: This is the seed that will (hopefully) grow the company.
Seed funding is used to take a startup from idea to the first steps, such as product development or
market research.
Once a startup makes it through the seed stage and they have some kind of traction — whether
it’s number of users, revenue, views, or whatever other key performance indicator (KPI) they’ve
set themselves — and they’re ready to raise a Series A round to help lift them to the next level.
In a Series A round, startups are expected to have a plan for developing a business model, even if
they haven’t proven it yet. They’re also expected to use the money raised to increase revenue.
Because the investment is higher than the seed round— usually $2 million to $15 million —
investors are going to want more substance than they required for the seed funding, before they
commit.
It’s no longer acceptable to have a great idea — the founder has to be able to prove that the great
idea will make a great company. The typical valuation for a company raising a Series A is $10
million to $15 million.
2. Expansion funding
Expansion funding includes Series B and Series C.
Companies that make it to the Series C stage of funding are doing very well and are ready to
expand to new markets, acquire other businesses, or develop new products.
Commonly, Series C companies are looking to take their product out of their home country and
reach an international market. They may also be looking to increase their valuation before going
for an Initial Public Offering (IPO) or an acquisition.
For their Series C, startups typically raise an average of $26 million. Valuation of Series C
companies often falls between $100 million and $120 million, although it’s possible for
companies to be worth much more, especially with the recent explosion of “unicorn” startups.
Valuation at this stage is based not on hopes and expectations, but hard data points. How many
customers does the company have? What’s it’s revenue? What’s it’s current and expected
growth?
Series C funding typically comes from venture capital firms that invest in late-stage startups,
private equity firms, banks, and even hedge funds.
Venture Capital
December 7 2017 Written By:  EduPristine
What is Venture Capital?
It is a private or institutional investment made into early-stage / start-up companies (new
ventures). As defined, ventures involve risk (having uncertain outcome) in the expectation of a
sizeable gain. Venture Capital is money invested in businesses that are small; or exist only as an
initiative, but have huge potential to grow. The people who invest this money are called venture
capitalists (VCs). The venture capital investment is made when a venture capitalist buys shares
of such a company and becomes a financial partner in the business.
Venture Capital investment is also referred to risk capital or patient risk capital, as it includes the
risk of losing the money if the venture doesn’t succeed and takes medium to long term period for
the investments to fructify.
Venture Capital typically comes from institutional investors and high net worth individuals and
is pooled together by dedicated investment firms.
It is the money provided by an outside investor to finance a new, growing, or troubled business.
The venture capitalist provides the funding knowing that there’s a significant risk associated with
the company’s future profits and cash flow. Capital is invested in exchange for an equity stake in
the business rather than given as a loan.
Venture Capital is the most suitable option for funding a costly capital source for companies and
most for businesses having large up-front capital requirements which have no other cheap
alternatives. Software and other intellectual property are generally the most common cases
whose value is unproven. That is why; Venture capital funding is most widespread in the fast-
growing technology and biotechnology fields.
Need Guidance? Ask from Experts!

Features of Venture Capital investments

The venture capital funding process typically involves four phases in the company’s
development:
 Idea generation
 Start-up
 Ramp up
 Exit
Step 1: Idea generation and submission of the Business Plan
The initial step in approaching a Venture Capital is to submit a business plan. The plan should
include the below points:
 There should be an executive summary of the business proposal
 Description of the opportunity and the market potential and size
 Review on the existing and expected competitive scenario
 Detailed financial projections
 Details of the management of the company
There is detailed analysis done of the submitted plan, by the Venture Capital to decide whether
to take up the project or no.
Step 2: Introductory Meeting
Once the preliminary study is done by the VC and they find the project as per their preferences,
there is a one-to-one meeting that is called for discussing the project in detail. After the meeting
the VC finally decides whether or not to move forward to the due diligence stage of the process.
Step 3: Due Diligence
The due diligence phase varies depending upon the nature of the business proposal. This process
involves solving of queries related to customer references, product and business strategy
evaluations, management interviews, and other such exchanges of information during this time
period.
Step 4: Term Sheets and Funding
If the due diligence phase is satisfactory, the VC offers a term sheet, which is a non-binding
document explaining the basic terms and conditions of the investment agreement. The term sheet
is generally negotiable and must be agreed upon by all parties, after which on completion of
legal documents and legal due diligence, funds are made available.
Types of Venture Capital funding
The various types of venture capital are classified as per their applications at various stages of a
business. The three principal types of venture capital are early stage financing, expansion
financing and acquisition/buyout financing.
The venture capital funding procedure gets complete in six stages of financing corresponding to
the periods of a company’s development
 Seed money: Low level financing for proving and fructifying a new idea
 Start-up: New firms needing funds for expenses related with marketingand product
development
  First-Round: Manufacturing and early sales funding
 Second-Round: Operational capital given for early stage companies which are selling
products, but not returning a profit
 Third-Round: Also known as Mezzanine financing, this is the money for expanding a
newly beneficial company
 Fourth-Round: Also calledbridge financing, 4th round is proposed for financing the
"going public" process
A) Early Stage Financing:
Early stage financing has three sub divisions seed financing, start up financing and first stage
financing.
 Seed financing is defined as a small amount that an entrepreneur receives for the purpose
of being eligible for a start up loan.
 Start up financing is given to companies for the purpose of finishing the development of
products and services.
 First Stage financing: Companies that have spent all their starting capital and need
finance for beginning business activities at the full-scale are the major beneficiaries of the
First Stage Financing.
B) Expansion Financing:
Expansion financing may be categorized into second-stage financing, bridge financing and third
stage financing or mezzanine financing.
Second-stage financing is provided to companies for the purpose of beginning their expansion. It
is also known as mezzanine financing. It is provided for the purpose of assisting a particular
company to expand in a major way. Bridge financing may be provided as a short term interest
only finance option as well as a form of monetary assistance to companies that employ the Initial
Public Offers as a major business strategy.
C) Acquisition or Buyout Financing:
Acquisition or buyout financing is categorized into acquisition finance and management or
leveraged buyout financing. Acquisition financing assists a company to acquire certain parts or
an entire company. Management or leveraged buyout financing helps a particular management
group to obtain a particular product of another company.
Advantages of Venture Capital
 They bring wealth and expertise to the company
 Large sum of equity finance can be provided
  The business does not stand the obligation to repay the money
 In addition to capital, it provides valuable information, resources, technical assistance to
make a business successful
Disadvantages of Venture Capital
 As the investors become part owners, the autonomy and control of the founder is lost
 It is a lengthy and complex process
 It is an uncertain form of financing
 Benefit from such financing can be realized in long run only
Exit route
There are various exit options for Venture Capital to cash out their investment:
 IPO
 Promoter buyback
 Mergers and Acquisitions
 Sale to other strategic investor
Examples of venture capital funding
 Kohlberg Kravis & Roberts (KKR), one of the top-tier alternative investment asset
managers in the world, has entered into a definitive agreement to invest USD150 million
(Rs 962crore) in Mumbai-based listed polyester maker JBF Industries Ltd. The firm will
acquire 20% stake in JBF Industries and will also invest in zero-coupon compulsorily
convertible preference shares with 14.5% voting rights in its Singapore-based wholly
owned subsidiary JBF Global Pte Ltd. The fundingprovided by KKR will help JBF
complete the ongoing projects.
 Pepperfry.com, India’s largest furniture e-marketplace, has raised USD100 million in a
fresh round of funding led by Goldman Sachs and Zodius Technology Fund. Pepperfry
will use the fundsto expand its footprint in Tier III and Tier IV cities by adding to its
growing fleet of delivery vehicles. It will also open new distribution centres and expand
its carpenter and assembly service network. This is the largest quantum of
investmentraised by a sector focused e-commerce player in India.