In recent posts, we have analyzed various startup situations from an entrepreneur’s perspective. In this and the following posts, we will see how the people on the other side of the table work, namely the venture capitalists. Having a perspective on how the other party thinks and works is important if you want to build a mutually beneficial relationship.
It is important to recognize that the entrepreneur and the VC are on the same team and have a congruence of objectives, that is, the construction of a successful company. Everything happens before the investment. As in all associations, if the relationship between the VC and the entrepreneur is viewed with suspicion and in an antagonistic way, the fight between the entrepreneur and the VC in the boardroom will kill the company. With that said, let us know to take a look behind the curtains on how venture capital firms operate. In this post, let’s understand the general situation of VC.
Venture capital firms raise money from investors and then invest it in a number of carefully selected, fast-growing companies. In the US, venture capital firms are typically associated companies. In India, venture capital firms follow a structure more in common with a mutual fund structure (due to legal and tax reasons, venture capital firms are not viable in India.
The venture capital industry in India has been clamoring for an American-style structure for a while now, but that’s another story.) That is, there is a venture capital fund in which multiple investors invest, and there is an investment management company (commonly known as an asset management company or AMC) that manages the fund’s investments.
In the US, typical investors in venture capital firms are pension funds, college grants, insurance companies, corporations, wealthy individuals, etc. In India, typical investors are wealthy individuals, financial and development institutions, and some corporations. Laws do not allow pension or insurance money to be invested.
Universities in India have no real funds or donations, even if they were allowed to invest! Therefore, it is quite difficult to raise funds in India for venture capital purposes. The tax treatments of Indian venture capital firms also act as disincentives. That’s why a lot of venture capital funds operating in India are actually offshore funds, based in places like Mauritius, with foreign investors, ensuring operational flexibility, tax benefits, and speed.
Compare this to venture capital activities in a small country like Singapore: A small country like Singapore, for example, invests huge sums of money (out of a corpus of more than $ 100 billion) around the world in various business activities. risk capital. These government-controlled investments are made with Singapore’s economic development, strategic reasons (eg new technology, entry into new markets) in mind, etc. Singapore is also the source of capital for many of the largest venture capital firms in Silicon Valley. There is a lesson for India somewhere!
In India, traditional investors in venture capital firms have been financial and development institutions such as ICICI, IDBI, SIDBI and the like. These private equity firms have had to deal with various operating limitations and have had difficulty dealing with high-risk investments due to the very nature of the structure within which they had to operate. Indian venture capital firms must be registered with SEBI (Securities and Exchange Board of India).
In recent years, India has seen the arrival of several independent Silicon Valley-style private equity firms such as Draper (who pioneered this movement in 1995), Walden, Chrysalis, and Infinity Capital. Many more are in the works and will bring world-class venture capital investment styles and standards with a deep understanding of technology, finance and strategy. India is expected to attract around $ 10 billion in venture capital funds by 2008. In 1999 it attracted around $ 300 million.
Against this backdrop of the VC situation, we will see how a VC fund / company operates in our next post.
This article was originally published on Venture Katalyst, India’s first e-zine aimed at entrepreneurs, started by Sanjay Anandaram