What is Startup? What Benefits or Value addition can be provided by Venture Capital Investors (VCs) to Startups?

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Contents

1. Introduction
2. Definition of Startup
3. Stages of Funding
4. Benefits of Venture Capital Investors (VCs) to Startups


Introduction

In August 2015, 

The Hon’ble Prime Minister, Shri Narendra Modi, announced 

The launch of the national flagship initiative – Startup India, 

with a mandate to promote and encourage young entrepreneurs of our country. 

With the aim of the initiative to transform India into a Startup nation, “a country of job creators instead of job seekers”. 

In the initial stage of business, products are generally untested and do not have an established market. Operations of firms are at a small level with no operating history and no comparable firms. 

The value of a Startup rests entirely on its future growth potential, which, in many cases is based on an untested idea and may not have been based on an adequate sampling of consumer behavior or anticipated consumer behavior. The estimates of future growth are also often based upon assessments of the competence, drive, and self-belief of, at times, very highly qualified and intelligent managers and their capacity to convert a promising idea into commercial success.


Definition of Startup

An entity shall be considered as a Startup upto a period of ten years from the date of incorporation/ registration, if 

i. It is incorporated as a private limited company or registered as a partnership firm or a limited liability partnership in India. 

ii. Turnover of the entity for any of the financial years since incorporation/registration has not exceeded one hundred crore rupees. 

iii. Entity is working towards 
innovation, development or improvement of 
products or processes or services, or 
if it is a scalable business model with a high potential of employment generation or wealth creation. 

Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’. 

Explanation- An entity shall cease to be a Startup on completion of ten years from the date of its incorporation/ registration or if its turnover for any previous year exceeds one hundred crore rupees.


Stages of Funding

i) Stage 1 : Seed Funding - Funding 

From Promoter’s Close Groups or 

From Startup India Seed Fund Scheme (SISFS) 


ii) Stage 2 : Growth/Expansion - Funding 

From Angel Investor / Venture Capital / Private Equity 

• Round A   • Round B Or From Debt 


iii) Stage 3 : Exit Funding 

• IPO     • M & A


Benefits of Venture Capital Investors (VCs) to Startups

Venture Capital Investors (VCs) and Valuation Investors particularly venture capitalists (VCs) provide benefits or add value to Startups in a lot of ways : 

a. Stakeholder Management: Investors manage the company board and leadership to facilitate smooth operations of the Startup. In addition, their functional experience and domain knowledge of working and investing with Startups imparts vision and direction to the company. 

b. Raising Funds: Investors are the best guides for the Startup to raise subsequent rounds of funding on the basis of stage, maturity, sector focus etc., and aid in networking and connection for the founders to pitch their business to other investors. 

c. Recruiting Talent: Sourcing high-quality and best-fit human capital is critical for Startups, especially when it comes to recruiting senior executives to manage and drive business goals. VCs with their extensive network, can help bridge the talent gap by recruiting the right set of people at the right time. 

d. Marketing: VCs assist with the marketing strategy for your product/service. 

e. M&A Activity: VCs have their eyes and ears open to merger and acquisition opportunities in the local entrepreneurial ecosystem to enable greater value addition to the business through inorganic growth. 

f. Organizational Restructuring: As a young Startup matures to an established company, VCs help with the right organizational structuring -and introduce processes to increase capital efficiency, lower costs and scale efficiently.




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