Besides funding, VCs offer guidance, mentorship, expertise and infrastructural support to startups
VC firms cash out the returns for the investment made at different stages of the business
What can startups do to strike up deal conversations with venture capitalists?
Amid the economic slowdown across sectors in India, venture capital (VC) funding has remained a stable source of money to nurture startups. Entrepreneurs tend to rely on VC funding as they come with the funds necessary to grow and succeed, even if it means parting with a chunk of the company equity.
Moreover, the guidance, mentorship, expertise and sometimes infrastructural support that comes along with a VC deal help greatly the growth, scale-up and expansion in the desired space within a short time. But this also means that raising venture capital for entrepreneurs is not an easy task as the VC firms seek a huge amount of return from the deal. Thus, to avail of venture capital, one needs to learn how to raise venture capital in India and the first thing that is required for it is an understanding of the VC firm’s functioning.
Understanding How VCs Work
As the startup ecosystem is gradually growing in the country, wealthy individuals, big enterprises and pensioners’ funds are finding it profitable to invest in and earn returns. These sources pull in the money to form a venture capital, which is managed by a firm that makes a portfolio, invests the money in startups on behalf of them and interferes in the startup’s business strategies to secure returns.
The VC investment in a startup is utilised by the entrepreneur to grow, expand, scaleup and reach the point of profitability, making an IPO charge or go for a merger or acquisition. As these deals take place, the VC firms cash out the returns for the investment made at different stages of the business. The actual fundholders or the limited partners are paid back returns from the money they provide for investment, while the excess is earned by the VC firm as profit. But of course, all these would succeed only if the right deal is made and the funding is efficiently utilised by the startup to gain a stable growth.
VC firms have limited partners (LP) at the highest level, who provide the fund out of own money and earn returns from its investment. general partners (GP) at the next level manage the fund accumulated, create the investment portfolio finalising deals with chosen startups and have a say in business strategies of the startups where the fund has been invested. For this, they earn management fees as well as carried interest from the share of profits made by the startup.
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The associates at the next level are the deal makers, in charge of maintaining relationships with the entrepreneurs. The lowest level is that of the analyst, who observe and analyse market, startups and budding entrepreneurs with potentially high returns and stable growth trends, to choose where to invest venture capital. To sail through these, the entrepreneur needs a thorough knowledge of how to raise a VC fund.
How To Strike The Right VC Funding Deal
As VC firms look for higher returns from the deal and startups have a higher probability of failure in its initial years, it’s immensely important to gauge the deals well. There are various steps, market surveys and background checks involved in the process before a deal is closed and venture capital is invested. Striking a good deal with the right investor or venture capital firm requires the entrepreneur to have tactical knowledge, a proper study of the market and knowing the right ways of alluring investors into the deal and excel in each of them.
- Picking The Right VC FirmThe foremost concern in raising VC funding is picking the right firm. To do that, the entrepreneur needs to do a market study, check the VC firm options available and find the firm with expertise in his/her sector, which can provide the right kind of mentorship to him/her. Let us take the case of how to raise venture capital for a tech startup to understand this. To survive, sustain and grow in the constantly evolving market of technology, a tech startup needs to stay updated on the latest happenings in the sector, new technologies and emerging innovations, and the status of the industry.So, only a VC firm with ample knowledge in this field and these aspects will be able to guide the startup towards higher returns. Also, since the utilisation of VC in the fund will be governed by the VC firm and the firm will have a say in business strategies of the startup, the investors must have a clear understanding and vast knowledge of the sector. So, while making the choice, the entrepreneur needs to gauge these abilities of the VC firm in question.
- Creating The Right First Impression
To ensure getting the fund for business, the entrepreneur needs to convince the investors about the potential of his business, the clarity of the strategies, growth path and business goals, the estimated time to earn profits and returns — all established well in the business plan. The business presentation, placed to the investors, has to be impressive, well-structured and supported by necessary data and documents to appeal strongly to them. The entrepreneur thus needs to make a really good business pitch, presenting a unique and interesting idea with all the information and data, clear business strategies, properly defined growth path, targets and business goals — striking enough to allure investors.
- Timing Of Investor Approach
With the pitch ready, the next step will be, approaching and persuading the analysts and associates of the VC firms to fix a meeting with the GPs for the deal to get them interested in investing. After that, the final step is convincing GPs and LPs with the presentation and clear views of the business plan, to reach the ultimate goal, closing the deal and getting the venture capital funding for the startup!
- Practising Healthy Caution
While placing the business pitch or convincing the investors for VC funding, the entrepreneur needs to be very careful about what information to share with the investors. Because, if the deal does not get finalised, the spread of information and idea of the business can be harmful to the startup’s growth and penetration in the market.Also, in the case of venture capital funding, the investors get hold of the company equity and thereby a say in business decisions of the startup as well as access to insider information. So, the entrepreneur and his team need to be cautious and tactical enough to safeguard sensitive information regarding the business.
Challenges For Entrepreneurs
Every step in a business comes with its own share of challenges and VC funding is definitely not an exception. With VC funding comes other things, that needs to be taken care of well. To start with, since raising VC fund for startups comes with conditions of earning a certain level of return and the VC firm having a stake in the company, the entrepreneur needs to gauge well his abilities to earn profits as well as the pros and cons of losing autonomy in business decisions and being accountable to the investment firm. Thus, knowing how to raise a VC fund requires an entrepreneur to understand whether he/she is in a position to enter a venture capital deal.
The investor’s access to insider information of the business is another big challenge. Sensitive information getting revealed in the market can not only pull down the success rate of the startup but can even lead to business failure. Moreover, it’s extremely harmful to the company’s image, reputation and branding of the startup too.
Also, when it comes to raising venture capital for entrepreneurs, one needs a proper market survey and background check of the investors and VC firms regarding their conditions of investment, credibility, success rates in terms of exits and experience level in funding startups.
This is necessary to finalise the investors and VC firms to approach and is mandatory if the entrepreneur wants to raise venture capital online because a wrong deal can get the entrepreneur in a soup. More so, the country is in the middle of a liquidity crisis, making the situation more complex and difficult for startups to succeed and earn higher returns. Stringent and over-ambitious conditions of venture capital investment can, therefore, add to the troubles, instead of helping!
But despite the odds of economic slowdown, poor exits and liquidity crisis, the startup ecosystem is showing signs of a reset through venture capital funding. Trends say that domestic capital shares in the VC fund are increasing while the Indian startups are eyeing global footprints and their movement along the evolution cycle is evident. Experts believe, that with the dynamic internet landscape is taking over the country and things are bound to shape up well and positive.