Pavithra Jaidev
INTRODUCTION A Venture Capital (VC) firm provides funds to small time emerging firms and startups which prove to have high growth potential. These firms invest in startups in order to get a stake in its ownership. They undertake huge risks by investing in an early stage startup, in anticipation of its future success. VC firms mainly invest in startups which are innovation oriented such as information technology, biotechnology, life sciences and social media. Venture capitalism traditionally
more » ... inated in the USA, which till date continues to be a key player in this field. But that being said, slowly this trend caught up with countries across the globe, as a result of which in the 20 th and 21 st century, there was a sudden increase in non -US based venture capitalist firms. Thus stated, this paper is an attempt towards decoding the new era of venture capitalism. This paper has been divided into three parts, of which the first part talks about VC firms structure. The second part would elaborate upon how funding takes place? and the last part would describe women roles in VC. STRUCTURE OF A VC FIRM A VC fund is a pooled investment vehicle which is managed by VC firms which majorly employ individuals who are highly qualified both in technological and management areas. This arrangement consists of high net worth individuals and institutions who have large amounts of capital. A venture capitalist is a person who makes investments on behalf of rich third party investors in enterprises which are too risky to be assisted by bank loans or capital markets. He is expected to have both managerial and technical expertise so he can assess which kind of firms to invest in. Venture capitalists usually have backgrounds which tend to have corporate finance, management consulting or investment banking as an experience and they are compensated via 1 4th Year BBA LLB Student, Jindal Global Law School VOLUME 3 ISSUE 5 is popularly known as 'seed funding' in order to prove the worthiness of their idea, where the product or the idea is still in its prototype phase, here apart from VCs even family, friends, close relatives, angel investors and super angel investors can be approached with funding requests. Thirdly, they help the firm ramp up, which means nurture the firms in which they have invested in order to increase the likelihood of reaching an IPO when valuations are favorable and to increase their return on investment. Lastly, when they exit the firm, they ensure the next incoming owner has the best interests of both the founders as well as the management team and will help the firm grow further. VCs finance their investment projects by following these six steps 4 : 1. Seed funding, 2. Series -A round which is popularly known as the first institutional round in order to fund the expenses associated with manufacturing a product or developing an idea. Its subsequent rounds are known as Series B, C, D and so on..., 3. Second round -which helps provide working capital to the firms wherein the firm has started selling its products but hasn't reaped its profits as yet. 4. Expansion also known as the mezzanine financing round, where in money is provided to expand the operations of the newly profitable company, 5. Exit of venture capitalistwherein VCs exit via a secondary sale through an IPO or via inviting an acquisition, and lastly 6. Bridge Financingwherein the objective is to seek funding in between full VC rounds in order to raise small portions of money instead of a full round in which existing investors can also participate. CONFIDENTIALITY AND RESTRICTION Unlike public companies, a startup firms' business related information is kept highly confidential and proprietary. In order to analyze the benefits and risks associated with investing in potential investment projects, venture capitalists' conduct due diligence, which requires significant information in relation to project company's business plan. This is mainly because investments made are illiquid and require extended time period to harvest during which period carrying out of due diligence becomes pertinent for making any investment related decision. But, while giving out such information, entrepreneurs are very vigilant about sharing information with VCs, that are investors in their competitors as well. As a matter of business practice, most VCs do not enter into