Outside of banks, brokerage firms, insurance companies, and other financial institutions. Other institutions also play a significant role in the financial market, particularly in equity-related matters. One of them is venture capital, which is invested in numerous established Indian and international companies like Google, Facebook, Microsoft, Oyo, and Ola Cab. have received initial funding from Venture Capital. India’s VC and start-up ecosystems continue to thrive as investors view the country’s high growth potential from a long-term perspective. Consequently, despite the fact that 2019 was a year of global economic slowdown, Indian VC industries prospered with the highest ever capital deployment of $10 billion.
The type of capital that has been, is, or will be invested in a venture is known as venture capital. The term “venture” is commonly understood to refer to a project that involves risk—risk in terms of the outcome. Since ventures are new, innovative projects that have the potential to grow, but their outcomes are highly uncertain.
Now, the meaning of “venture capital” in this context is an investment made by wealthy investors or businessmen with the goal of making a lot of money in any start-up business that has a good chance of growing, flourishing, and having a lot of turnover. Venture capitalists are the investors who make investments in these innovative new businesses. The venture capitalists receive significant stakes in the startup company and seats on its boards of directors in exchange for their investment.
VC firms take steps to improve a new company’s chances of success with the support, cooperation, intervention, and assistance of their board members. When a company is sold through a stock market listing, merger, or acquisition, or when a startup fails to perform as expected, the venture capital process is complete.
It should be made abundantly clear that venture capitalists do not make equity investments in new businesses out of their own pockets.VC firms make investments using money they get from limited partners and other wealthy businesspeople who are interested.As a result, the fund-holders get their money back from the exits, while the VC company makes a profit and brings the investment cycle up to date.
The scope of venture capital
Venture capital has a very broad future, particularly in developing nations like India.We have the technology we need to keep track of our day-to-day activities and share useful information with friends, family, colleagues, and others. Numerous lives are saved thanks to the development of new technologies. It makes the world more livable and enhances the quality of life and work.
Counties with a growing population need to create jobs at the same rate that middle-class people need newer, faster technologies and have access to more money for additional technologies of this kind to emerge to make more concepts a reality. New startups and industries are being established throughout the nation in an effort to bring more innovative ideas to us and to generate large-scale employment. To grow and expand, these new industries and start-ups require capital.
Because of this, venture capital was created to lend innovators equity as a hand of trust. Every day, venture capital investment plays a larger and larger role. The most active year for venture capital investments was 2019.
The realization that a modern economy cannot achieve its full potential without fostering the innovative efforts of its entrepreneurs has increased the prospects for venture capital. In order to improve the Indian startup ecosystem for the time being, the Indian government introduces a number of regulatory programs.
Startup India, Digital India, and the Alternative Investment Policy Advisory Committee all flagship initiatives—continue to improve the economic environment for investors and start-ups. Investor confidence in the administrative ecosystem has been raised as a result of India’s remarkable rise from 130 in 2016 to 63 in 2019 on the World Bank’s ease of doing business index.
The following are some characteristics of venture capital: High risk Investment The outcomes of an investment are always uncertain. The fact that venture capitalists (VCs) make investments in start-ups that have neither a track record of success nor any prior experience in the business sector increases the level of uncertainty. The rule is that the greater the risk, the greater the profit, and venture capital firms’ goals are to achieve higher returns.
High-Tech Project Generally, venture capital investments are made in high-tech, futuristic projects or areas that make use of new technologies because these projects have a greater chance of generating multiple returns.
Length of Investment
In contrast to publicly traded investment instruments, VC investments do not offer a short-term pay out option. The majority of venture capital investments last for nearly three to seven years or more. Venture capitalists use their talent and business acumen to assist a startup in expending and making more profits in order to eventually exit with more profits, as they seek significant returns on their investment.
Illiquid Investment When a company’s securities are illiquid, investors are unable to withdraw their money from the investment at any time—even at a loss—by selling the securities they own in that company. An investment in venture capital is not subject to a repayment schedule or demand for a refund.
Need for Venture Capital for Startups
When someone comes up with an innovative idea, they need money to put that idea into action and make it into a project that can be sold. Through its members of boards of directors, venture capital provides startups with the necessary capital, improved management, and valuable business advice.
Venture capital provides a significant amount of financing that a business needs to grow. A significant amount of capital is provided by venture capital for a business’s expansion. Startups can expand their businesses through venture capital in ways that would not be possible with bank loans or other options.
Expertise joining the business Venture capitalists offer helpful advice, connections to other businesses, and other facilities. These specialists are well-versed in the particular standards of the market, and as a result, they are able to assist a new business in avoiding many of the drawbacks that are typically associated with new businesses.
Better management Entrepreneurs typically also have excellent business management skills. Nevertheless, Venture Capitalists will have a say in the company’s management due to their ownership of a portion of the equity. This is a significant advantage for an innovator who is not particularly adept at business management.
The role of lawyers in venture capital
Venture capitalists need lawyers to do things like conduct due diligence, write agreements, negotiate investment terms, and sometimes even represent the interests of VCs.
Previously, only large VC firms with billions of dollars in assets employed legal experts. Now, however, due to the complex regulation and management of the company, nearly every VC firm, including medium and small firms, employs legal officers to handle these issues so that they can concentrate on the business aspect of the company rather than the legal nitty-gritty.VC firms had to go through a thorough due diligence process before making an investment in a start-up in order to ensure that their investment would yield a substantial return.
Contract Drafting While it is not required to draft a contract in order to make it legally enforceable, it is recommended because it ensures that all terms and conditions are recorded for future reference. Lawyers are needed by VCs for this reason.
Legal staff at venture capital firms are also responsible for reviewing the terms and conditions of contracts that startups have signed with customers, vendors, insurance companies, and others.to get a better understanding of their work and responsibilities. Lawyers use this method to help VC firms negotiate more effectively.
Investors look for vigorous start-ups that have high business potential and innovative products as well as pioneering and revolutionary technologies that can maintain a market advantage. Innovative products or services can only gain a long-term competitive advantage if they are protected by intellectual property rights. In this case, the VC lawyer’s job is to check that the start-up in which the VC firm is investing does not violate any intellectual property rights of third parties.
The venture capital firms also rely heavily on litigation attorneys. Litigation attorneys are needed by VC firms whenever they are sued, whether by investors or startups themselves. In some cases, agreements between venture capitalists and start-ups include a provision stating that the venture capitalists may sue the start-up in the event of its failure; at that time, litigation attorneys were also required by the venture capitalists to enforce that provision.
Startup businesses are crucial to a nation’s prosperity and economic stability. Venture capital is absolutely necessary for any startup’s expansion. It ensures that startups have access to sufficient equity. In addition to playing a crucial role in the expansion and growth of startups, venture capital investment can sometimes have negative effects on their health.
In the form of equity investments and management support, Venture Capitalists provide a significant amount of assistance to young, innovative businesses with high potential. Their long-term objective is to enable the startup to provide a high turnover rate so that, in the end, they can withdraw profits. In light of this, venture capitalists, on the other hand, seek proportional stakes in the startup company. As a result, startups may sometimes have very little control over their own businesses.
It is common knowledge that nothing can be entirely positive or negative. The same is true for venture capital as well. Despite the fact that venture capital investments have some drawbacks, they are strongly recommended for the country’s economic health. And as a result, counties are making it easier to comply with regulations to attract more VC investments. India is not an exception to this rule. Start-up India launched in 2015, and as of February 2018, 6,981 startups had been registered with the DIPP, drawing a significant amount of venture capital funding.
Article by Roli Nayan