Venture Capital Investment is a formation of private equity financing come up by venture capitalists or capital firms and invest funds in the early stage companies or startups with deemed high level growth, in exchange for equity or an ownership stake. Venture Capital Funds contains a dedicated pool of capital, raised as per regulations of SEBI. Venture capitalists take the risk of financing these companies as they hope they will become successful in future and can give a good return on investment. These startups included high risk of uncertainty and if not did well there would be a high rate of failures. Nowadays, Venture Capital Investment is a primary way of funding and investment for companies without access to capital markets to fund innovation.
Who can invest in Venture Capital?
Most of the Venture Capital Investments comes from Limited Partner investors or LPs, who are high net worth individuals and high level institutional investors.
Institutional investors: Investment done by large institutions like corporations, endowment and pension funds, charitable trusts and hospitals.
High net worth individuals: These are the people who have high net worth of over $2 million in liquid assets and invest their wealth.
How Venture Capital Works
Invention and innovation drive an economy. The junior people are allowed to be analysts. The main role of the analysts is to find and scout deals that might be within the investment strategy of the fund that the VC firm is investing out. Analysts are not able to make decisions, but they have to gather the important data which help to make the decisions. Their investing know-how and investing experience were as valuable as their capital.
Sufficient Returns at Acceptable Risk
Venture capital funds are generally provided by large institutions such as pension funds, insurance companies, financial firms and endowments and used to put a small percentage of their funds into high-risk investments. These investors expect a return between 25% and 35% per year over the lifetime investment. The investment is made after checking the firm’s overall track / funds record and then investments are made taking a high risk.
Mistakes During Venture Capital Investment: Below are some of the mistakes to be aware of and need to avoid during venture capital investment:
- Not exploring all the funding options
- Overspending and over crowdfunding the cap table
- Rushing with more ad spending
- Not focusing on profitability
- Taking a short-term outlook on venture capital
- Disclosing a company’s worth too quickly
- Taking early round valuations rather than exit valuation and proceeds
- Ignoring due diligence process
Venture Capital Investment is not as easy as most people think. To get success, one needs to implement a correct strategy that will require a great deal of time and capital. Venture capitalism isn’t for everyone: You have to be very careful and have good future planning and vision of the adverse effects. No doubt the risk is there but at the end it may be gaining a lot. If you are a start-up or emerging company and looking for Venture Capital money, now is the right time to get into action.