IMPORTANCE OF VENTURE CAPITALISTS & ANGEL INVESTORS FOR THE GROWTH OF STARTUPS

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Venture Capitalists (VC) & Angel Investors are considered to be the lifeblood of startups because they provide a solid foundation to the business ideas of many entrepreneurs. Today, they have emerged as an easily accessible solution to many of the startups in the world. VC investments are usually made in the early stage of development of startups as this is the phase where startups face most difficulty in getting the required support. Before discussing further on this, it is important to know who are venture capitalists & angel investors & the key role played by them in Indian economy.

A venture capitalist is basically a private equity investor that provides capital to companies with high growth potential in exchange for an equity stake. They provide support to startup ventures as well as small companies that wish to expand further. Venture capitalist firms are usually formed as Limited Liability Partnerships & the investment is mainly done by all the partners. There is a step by step process before making the investment decisions. Usually, small committees are set up by the VCs  to identify the startups & emerging companies that have high growth potential in future. Apart from that, they also look for  a strong management team, a large potential market, a unique product or service with a strong competitive advantage, extent of risk involved, financial forecast, etc. They evaluate the business plan thoroughly & if they find it to be worth considering, then only they go for investment. The funds are deployed from pooled investor capital in exchange for a sizable stake of equity of that startup or company. However, VCs experience high rates of failure due to the uncertainty that is involved with new and unproven companies. Some of the top venture capitalists in India include Sequoia Capital, Accel, Blume Ventures, Elevation Capital, etc.

Angel investors are individuals having high net worth who typically provide financial assistance to small startups in exchange for ownership equity or convertible debt in the company. They are opposite in nature to venture capitalists as they use their own money & provide more favourable terms as compared to other lenders. Some angel investors also invest through crowdfunding platforms online or build angel investor networks to pool capital together. Apart from investment, they also provide adequate mentoring to the budding entrepreneurs in order to succeed in their new ventures. The effective internal rate of return for a successful portfolio for angel investors is approximately 22%. Angel investors are considered to be an ideal solution for startups because cheaper sources of financing such as banks are not usually available for early stage businesses. But the main disadvantage is they do want to see an exit strategy at some point where they can pocket their profits, typically through a public offering or an acquisition & also they want 10% to 50% stake in the company in exchange for funding. The top angel investor of India in 2021 was Kunal Shah followed by Kunal Bahl, Rohit Bansal, Ramakant Sharma, etc.

Both venture capitalists & angel investors plays an important role in promoting the startup ecosystem in India. They are valuable contributors in both filling the financial gap and providing value added services like financial, technological, managerial support, and contacts. Investments of both these parties surged rapidly in 2021 indicating a positive outlook for all the upcoming startups in India.

 

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