Young companies or primarily the startups that are in their initial stage of development, seek VC (Venture capital) funds in order to finance, grow, diversify, and most importantly run their business operations. Venture capital funds are provided by private investors to these corporations or startups in exchange for a stake in equity. The presented article will not only discuss the definition and importance of venture capitalists but also, put light on the reasons for their sudden growth in the equity market.
Money, either in liquid or in the form of DD (demand deposits) is the lifeline of any corporation, may it be a company, a startup, an NGO, etc. Right from the very start, the entrepreneurs need funds to begin their operations, set up an office, advertise and market their products, etc. The unavailability of finance will definitely land them in trouble. To cite a pertinent example, most of the businesses were hit terribly during the onset of the nationwide lockdown imposed due to the uncontrolled spread of COVID- 19. The production (primary sector) and manufacturing (secondary sector) activities were discontinued for a major period of time which had a significant impact on the tertiary sector as well. This harmed the growing motivation of budding leaders, teams, or startups.
Since money is the blood of the operations, an imperative question that arises here is how do a startup with zero revenue finance its management and work and how do the existing foundations increase its financial or capital base? This is where Venture capitalists enter into the scene and mitigate the financial burden from the shoulders of budding entrepreneurs.
As discussed already, VCs are private equity investors that provide capital to companies or startups with high growth prospects and potential for the sake of equity. Venture capitalist firms are usually formed as Limited Partnerships (LPs) where the partners invest in the VC fund. The fund normally has a committee that is entitled to make decisions related to investment. Once promising and emerging growth companies have been identified, the pooled investor capital is deployed to fund these firms in exchange for a sizable stake of equity. Primarily there are two reasons why they (Venture capitalists) help these corporations.
Following are the points in elaboration:
- Startup Benefit:
VCs invest in only those startups which appear to have innovative ideas and well-coordinated team ethics. Venture capitalists, also known as risk capitalists, are highly disciplined people when it comes to investment or making money. They invest in a particular idea if it appeals to the LP (Limited Partnership) Committee. The idea is evaluated on the basis of its uniqueness, adaptability to both the economic and legal environment, coordination of the management, and presence of competitors in the market.
- Access to Equity Market:
There are companies that have already diversified their business operations, achieved substantial revenue targets for multiple financial years but are facing hindrances in raising capital further or want to access the equity markets. This is when these companies are assisted by private venture capitalists.
VC investors have poured in about $20 billion into Indian companies during the first nine months of 2021, which marks an increase of 150 percent from the same period last year as against a 97 percent growth in China where deal value increased from $34 billion to $67 billion, according to data from the tech intelligence firm, CB Insights.
India’s VC deal volumes and values reached record highs in the third quarter of this calendar with 519 companies raising a total of $9.9 billion compared to $3.3 billion across 288 deals in the same period in 2020. Early-stage deal share in India’s venture capital funding grew up to 75 percent till October 2021 as against 58 percent in China. But why and how this trend is being supported? We will discuss it in the upcoming passages.
Regarding the reasons, why the capital funds are flowing so massively into the economy, the first and foremost one is related to the awareness of people. The increased access to digital or IT tools and the spread of Internet technology in nearly every corner of the world has catalyzed in educating people about the advanced ways of investing money without much effort or cost. This has attracted a sizeable majority of people to pursue the game of investment as a side hustle to their full-time jobs or studies. Consequently, increasing the number of investors. The inclined spread of investing resources, guides, courses, etc. has inspired many to take become formal venture capitalists. As a result of this, they are looking for lucrative projects or startups with high potential, to invest in their money.
Another pivotal argument or reason is related to occupational shift. According to a survey conducted by Labour Statistics, from the past few decades, there has been a tremendous shift in the mentality and ideas of the young graduates. Earlier they focused on grasping placement opportunities as provided by their respective universities or institutes but, this is not the scenario today. With the advancement in the skillset and mindset of these graduates, they are shifting their focus from getting a corporate job to achieving a target of giving jobs to others. In another sense, they are inclined towards shaping their ideas into a successful business plan in the form of a startup. Due to increased awareness of doing business, possession of lucrative thoughts, and productive skills they are attracted to the exciting world of entrepreneurship. This has tremendously increased the number of startups in the modern world. Moreover, graduates today are of the belief that corporate jobs do not match the standard of their education or skill level. Hence, the more the number of startups in the economy, the more would be the requirement of funds and business finances. This further motivates or persuades the venture capitalists to work in this direction and fund viable ideas with the required amount of money. In addition to the same line of thought, due to the onset of technology, digital marketing, etc., it has become really feasible to work or to start an enterprise, though by completing stringent legal formalities.
It is an undeniable fact that the funds from venture capitalists are flowing into the economy real quick due to the reasons stated above. But one major reason that underlines the whole explanation is the availability of limitless opportunities to earn money. In the contemporary economic environment, people are working on multiple projects facilitating their side earnings. To cite an example, people with corporate jobs are either working as a part-time freelancer, may it be in the field of online tutoring, content writing, website building or coding, cooking, insurance associates, etc. This allows them to earn income from multiple sources and as an aware part of the investing functionality, they tend to invest a small amount from their total earnings into the funding of newly emerging startups or corporates. Their primary motive is to earn but at the back of their mind, they want to learn more about the art or the skill of making successful investments. This reason further increases the total circulation of money into the VC funding.
To conclude, VC funds are flowing into the commerce games rather quickly due to the most imperative reasons discussed above. This indeed has a positive impact on the economy as more corporates and startups get the initial boost to start their operations and support their ideas which would not have been possible without the modern techniques or methods of investing or financing.