What does it mean?
Venture Capitalists basically invest in new and meritorious ideas. It is a form of private equity funding that is provided to high-potential ideas at their nascent stage. For some start-ups, it is enough to have an idea and a reputation. However, for most it will require a story, a product, and some amount of customer adoption. But, this is offered to those ideas which show substantial development who envision their growth and revenue creation thereby generating high returns.
India is ranked the third largest start-up ecosystem globally with more than 8900 to 9300 start-ups and creating over 14 lakh jobs. Around 18% of the start-ups are leveraging deep-tech, fin-tech, retail tech which are the most promising sectors with strong metrics.
Therefore, it is a financial tool for start-ups and companies who are unable to acquire the necessary funding through conventional means and it is an investment vehicle for the venture capitalists. For the venture capitalists, the risk of investing is offset with high returns.
How does it work?
The venture capitalists create venture capital funds i.e. a pool of money is collected from other investors, high net worth individuals or various other funds. In an ideal scenario, investors infuse capital for 2 years and earn returns on it over the next 5/10 years. In other words, it’s a way for the companies to receive money in the short term and for investors to grow their money in the long term.
Let’s talk about Sequoia Capital for understanding. Sequoia Capital India, the Indian arm of the US based company – it receives money from its limited partners (LPs) across a venture fund and growth fund. Sequoia Capital operates in seed, venture and growth funds, thereby supporting a start-up right from the scratch.
The primary benefit of a venture capital is the ability for the company to grow that would not be possible through bank loans or conventional methods. These venture capitalists are basically shouldering the investment risk because they believe in the company’s future growth.
Why venture capital?
The founders prefer raising multiple venture rounds from the same fund or attract new venture capitalists as the relationships reign supreme in an ecosystem that doesn’t depend on credit bureau scores and heavy documentation for seeking just one loan.
In addition to capital, start-ups prefer venture capital to tap on their valuable expertise, assistance and industry networks. Cause these capitalists have a wide range of network and resources as well as an inordinate length of time in overseeing the growth of start-ups, the guidance and mentorship is unmatched. Like the investment of Sequoia Capital in Google, their relationship is on-going for nearly two decades. This way they don’t limit themselves only to early-stage investments but guide them throughout to grow.
Venture Capital transactions allows companies to finance their operations without taking on the burden of the debt. Because these start-ups offer them shares instead of having to pay interest or a monthly instalment.
Venture debt, also known as venture lending, refers to a variety of debt financing products offered to early and growth-stage venture capital-backed companies. Provided by technology banks and dedicated venture debt funds, venture debt generally consists of a three to four-year term loan or equipment lease.
This segment will be covered in detail in a future post.
What are the venture capitalists looking for?
They’re more interested in how the founders acquire their customers and use their money, time and resources wisely with as little as possible. Plans often fail to explain how they will bootstrap themselves in start-up mode. Specifics matter more than unsupported assumptions. WhatsApp would be the best to illustrate this. Sequoia spent nearly 3 years working with the messaging app at the incubation period and during the growth stage. Sequoia invested $60 million at the seed stage and it made around $3billion after Facebook acquired WhatsApp. It is 50x return on its investment in the company.
What are the natures of venture capital?
Seed funding
Capitalists invest when they when they hear an idea i.e. compelling, when they are convinced that the company can envision their growth and the opportunity described is huge and material. Seed funding is the initial round of raising capital.
Did you know? Sequoia Capital has always associated early. Albeit they associate with all companies at various stages they prefer the being involved when the odds of success are slim. They were the first investors in Google, Yahoo!, LinkedIn, Youtube and WhatsApp.
Series A Funding
It is the next round of capital. Once a start-up makes it through the seed stage, they have some sort of traction created, be it the number of customer’s or revenue. At this stage the start-up has verified sales channels and is ready to scale their product i.e. to outbreak in the market.
Series A funding is of utmost importance; this is the point where various start-ups fail. Here, the investment will be higher than the seed round and the capitalists look for more substance than required in seed funding.
Did you know? The consumer electronics company Jawbone was one of the most remarkable failures in the history of start-ups. Despite the funding from Sequoia and Khosla Ventures, the device maker could not take off after it’s launch of the fitness tracker.
Series B Funding
This is the third wave required for the start-up. This is required for expansion, a struggle to gain market share. Series B is less risky than Series A funding, and consequently there are usually more interested investors cause the start-up has already established itself in the market. This funding may come from the same investors who primarily offered Series A funding or it may come from additional investors who specialize in investing.
Did you know? The credit card bill payment Cred raised $4 million from Sequoia Capital as Series B funding to accelerate it’s growth and expansion.
Series C Funding
If the start-up has made it to this stage, then they have already established themselves in the market. Mostly, Series C companies are looking to take their product international. Or they may also increase their valuation before going for an IPO.
Series C is often the last round that a start-up needs although some do go on to raise Series D and Series. However, it’s more common that a Series C round is the final push required for its IPO.
Did you know? The Bengaluru based wealth management fund Groww raised Series C funding from Sequoia Capital.
Albeit, even Airbnb took to series C funding to be a candidate of the 2020 IPO, the reality took a turn as Covid-19 swept in and they went public on 10th December 2020. Sequoia Capital is pumping funds and their expertise into revolutionary companies thereby encouraging international expansion.
Hence,
These milestones mark the differences between the funding stages. The combination of a captivating idea with sustainable financial venture capitalists attracts a start-up system to a unicorn.
This post was written in collaboration with Asif Yahiya Sukri LLP. Asif Yahiya Sukri LLP provides unparalleled personalized financial services to a broad range of clients across different geographical locations. With a presence in the USA, India and the MENA region, they ensure that all of your financial decisions are made carefully and with your best interests in mind. They are innovators who understand what goes into building companies.
You can also reach out to them on info@aysasia.com
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