How Venture Capital Funding Works in India

Venture Capital funding is hot topic in India but there are lot of entrepreneurs and startup which are confuse about the How Venture Capital Funding works in India. Even most of the Indian traditional entrepreneurs don’t know about the venture capital funding or Angel Investor. They are always looking for the banks or other sources of the funding.

How Venture Capital Funding Works in India

What is Venture Capital ?

As per the Investopedia Venture capital is money provided by investors to startup firms and small businesses with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns.

How Venture Capital Funding Works in India Video Explainer

People Behind the Venture Capital Funding ?

These people are entrepreneurs, financial wizards, and the like set up venture capital funds which is recognized by the SEBI in India. There are 2 category of the people in a venture capital fund –

  1. General Partners (GP)
  2. Limited Partners(LP)

General Partners – GPs serve to manage the fund and execute investments with the capital in order to return that capital to the LPs.

Limited Partners – Based on GPs proposal various different domains expertise investor will come and commit their money to the venture capital fund in India.

Simply put, the LPs invest into the venture capital fund and the GP manages the venture capital fund.  The venture capital fund invests into the portfolio companies. The venture capital fund is governed by a contract between the GP and the LPs called the Limited Partnership Agreement (“LPA”).  The LPA lays out all of the terms for managing the venture capital fund.  The fund also has a contract with the General Partner to manage the fund.

How Venture Capital Funding Works

Image Courtesy : ttvc.ca/wp-content/uploads/2013/01/Venture-Capital-Process-Infograph.gif

How Venture Capital Funds Makes Money in india ?

VC Firms are making money through two terms i.e is Management Fee which is earn by the GP’s and Carried Interest which is earn by both GP’s and as well as LP’s.

Management Fee :-  management fees are usually defined as the ‘cost of having your assets professionally managed. VC funds typically pay an annual management fee to the fund’s management company, as a form of salary and a way to cover organizational and fund expenses.

Carried interest or carry :- As per Wikipedia  when an investment is successful, a carry represents the share of the profits that is paid to the fund managers. As per startupxplore Carried interesting in Venture Capital is usually 20 to 25 per cent, meaning that while 20% of the profits go to the general partners, 80% belongs to the limited partners.

Stages of the Venture Capital Funding –

VC Firms can invest from seed funding to series A or above. They are looking for the highly growth business where they can exit easily through IPO or Acquisition. Here are the perfectly explained about Stages of the Startup Fund Raising.

How Venture Capital Firms in India Exit ?

They have lot of options for the exit from a startup. Most popular are followings –

Mergers and acquisitions: The most common way for venture-backed companies to exit is through mergers and acquisitions (M&As).

IPOs: In some cases, becoming publicly owned and traded on the stock market is better for a company than undergoing a private acquisition. In these cases, the company has an initial public offering (IPO), when it sells stock publicly for the first time.

Stock buybacks: In a stock buyback, the company buys stock back from the angel or VC investors. In this exit, the VCs get their money back directly from the company instead of from new investors in an IPO or from another company in an M&A.

Here are well explained Daily Updated Chart about Startup Funding Raising in India by trak through Venture Capital Firms.

In Below Info graphics well explained by FundersandFounders about the stages & How Funding works in Startup World.

How Funding Works

Source : Fundersandfounders

Hope this Article helpful for you understanding about the How Venture capital funding is work in India for the startup. You learn about 17 ways to raise the funds for your startup in India apart from Venture Capital Firms in India.