What is Venture Capital and how does it Work?
The startup world has experienced a lot of change over the past two years, and there have been a ton of new businesses that are thriving all over the world. What could be the driving force behind so many people choosing the difficult yet rewarding path of entrepreneurship—knowing that having a good idea alone is not enough to succeed in business and that you need money to grow your enterprise? This was made possible, in large part, by the generous Venture Capital funding provided to expanding businesses.
Let's use India as an example, because today's startup market has much better funding opportunities than it did ten years ago. In fact, For the fiscal year 2021, Indian startups raised an astounding 42 billion US dollars.Redaing the numbers we can get an idea that VCs these days are ready to invest in startups if the business model is good and profitable for a longer period of time.
Continue reading to learn everything there is to know about Venture Capital, including How Venture Capital Works.
What is Venture Capital?
Venture Capital (VC) is a form of private equity that funds startups and other early-stage emerging companies with little to no operating history but significant potential for growth. Inexperienced companies sell ownership stakes to Venture Capital funds to get financing, marketing, financial support, and managerial expertise.
The people who actively seek out good investment opportunities for their company and assist in raising capital for venture funds are known as Venture Capitalists. The success of an industry is more important to Venture Capitalists or investment capitalists than to a single entrepreneur. That is to say; they continually scan industries for businesses that are expanding quickly and invest in them. After doing so, they typically join these startups and have a say in their operational and strategic choices.
Typically Venture Capitalists can be divided into three types: Domain experts, operators and networkers. Domain expert VCs have years of experience in the particular startup domain and know the ins and outs of building in a particular domain. Operate VCs have a record of growing and skating businesses in the industry. Networkers are the ones who have a network of allies that can easily help connect new entrepreneurs with domain experts and operators.
How does Venture Capital work?
Venture Capital funding works just like any other type of funding: if you as an entrepreneur have a plan and a business model, you need Venture Capital investors. Then, after analyzing the plan, you strike a deal and boom! You have the capital to work on your business.
Venture Capital firms fund new companies in the early stages of development. The Firm VC takes an ownership stake, typically less than 50%, in return for funding. A VC's goal is to inverse the value of the startup so that it is valued more and then profitably exits the investment by selling its stakes or through an initial public offering (IPO).
There are four important players in the Venture Capital industry:
- Entrepreneurs who start a startup need assistance and guidance through funding to realize their vision.
- Investors are willing and open to taking significant risks to pursue high returns.
- Investment bankers need companies to sell or take public.
- Venture capitalists profit by creating markets for entrepreneurs, investors, and bankers.
Entrepreneurs who are looking for capital submit their business plans to VC firms in the hope of getting funded. The VC firm will conduct a rigorous business plan analysis if it finds it promising. This analysis will include a deep dive into the business model, product management, operating history, and other areas related to the quality of the business and idea.
The VC firm will offer capital in exchange for an equity stake if the due diligence procedure is successful and the business's growth prospects are favorable. Frequently, capital is provided in multiple rounds, and the VC firm will actively participate in managing the portfolio company.
Venture Capital represents a central part of how businesses are operated these days. Before a startup can earn revenue and reap the benefits from years of hard work, it needs enough startup capital to hire employees, rent facilities, and begin designing a product. The venture capitalists are responsible for all this funding in exchange for equity in the startup company.