VENTURE CAPITAL FUND

VENTURE CAPITAL FUND

Subject : Economics

Context : India received venture capital and private equity investments worth $7.5 billion across 67 deals in April, a sixfold rise over the same month last year on low base effect, as per the Indian Private Equity and Venture Capital Association-EY report.

Concept :

• Entrepreneurs need investments for their start-up companies. The investments or the capital that these entrepreneurs receive from wealthy investors is called Venture Capital and the investors are called Venture Capitalists.
• VC firms reduce the risk of investments by co-investing with other VC firms. Usually, there will be the main investor called the ‘lead investor’ and other investors will be called ‘followers’.

How does Venture Capital Fund work?

• Venture Capital Fund is made up of investments from wealthy individuals or companies who give their money to a VC firm to manage their investment portfolios for them and to invest in high-risk start-ups in exchange for equity.
• The basic idea is to invest in a company’s balance sheet and infrastructure.
• Venture Capitalist nurtures the idea of an entrepreneur for a short period of time and exits with the help of an investment banker.
• In a start-up company, VC will receive an equity partnership in exchange for investments in the start-up company.
• VC’s receive liquidation preference, it means in the worst-case scenario where the company fails, VCs are given the first claim to all the company’s assets and technology.
• It also offers voting rights over key decisions like Initial Public Offer (IPO) or even sale of the company.