How venture capitalist work and their role in start-ups

aditya raj sharma
Sep 24, 2017 · 4 min read

Understanding how venture capitalist works is not only important for the start-ups but also for all those aspirants that want to pursue entrepreneurship as a career at some point of time in their life. Before going any further let's breakdown the meaning of venture capitalist. So in simple words “A venture capitalist is an investor who either provides capital to start-ups ventures or supports small companies that wish to expand but do not have access to equities markets. Venture capitalists are willing to invest in such companies because they can earn a massive return on their investments if these companies are a success”.

So in order to understand how they work we need to look at the popular misconception people have regarding the venture capitalist firms. For example there is belief that mostly venture capitalist invest in the start-ups only and are looking for the innovative idea that they think can work for example in the year 1997 in US the venture capitalist invested around $ 10 billion of which only 6% that is 600 million went to start-ups. It is also seen as that the venture capitalist investment are more often used in not during the innovation or as the early investment but as mostly during the next stage of the innovation life cycle — the period in a company’s life when it begins to commercialize its innovation. As per a research it has been also found out that 80% of the investment done by the venture capitalist goes into building the infrastructure required by the start-ups to grow further. — in expense investments (manufacturing, marketing, and sales) and the balance sheet (providing fixed assets and working capital).

Another thing that can be kept in mind while dealing with venture capitalist is that thee venture money is not long-term money. The venture capitalist usually take decision to invest in the start-ups when the latter has reached sufficient size and credibility so that it can be bought by a big corporation or so that the institutional public-equity markets can step in and provide liquidity. The venture capitalist buys stake in the innovation idea of entrepreneur invest in for short period and then exist with help of investment banker. Basically venture capitalist expect return of around 35–45% in whole life time of their investment. When thing that is extreme important is that venture capitalist investment not entirely depend upon the so called idea only but it depends upon a great deal on the founder’s attitude and way of working.

The venture capitalist also takes deeper interest on the management on all how experience they are in the respective field they want to explore with venture capitalist money. Venture capitalist have hard time in believing that the entrepreneur with no such experience and managerial skill does have the potential to big or not.

The main advantage of venture capitalist for the start-up as compared to any other means of raising capital especially when compared to the debt the wish to from commercial bank. The major benefit is the sharing of risk which actually reduce burden from start-up. Another is the value added investing which means that venture capitalist not only invest but also proves to be the a great source experience for the young entrepreneurs and also help in making many decision making process. The start-up also don’t have to incur any fixed expense when compared to the interest is paid to the loans from banks or similar institute.

However it totally depends upon the perception of the start-up how they take investment made by VC’s such as some disadvantage which can be perceived by those who do not want to share their company with anyone as we have seen the dilution of shareholding which many VC’s depend. Many times their however some reported instance that the third party governance have interrupted the working of the start-up.

On-an all it depends upon the start-up to take the help of venture capitalist money or not. But there is no argument that venture capitalist main interest are in favour of the start-up boom in the world. If used wisely there can be more companies like Google or Facebook in the world as they don’t have to get worry about the investment part which results in many good start-up idea never reaching the implementation stage. Venture Capitalist have emerged as new hope for the Young budding Bill Gates.

Reference:

https://www.wfnen.org/blog/how-vcs-work

https://www.techinasia.com/how-to-get-venture-capital-funding-beginners

https://hbr.org/1998/11/how-venture-capital-works

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ENT101

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