Hunting the Unicorn
You are an entrepreneur with a fantastic idea on the way to starting your own venture. With no background or financial backing you cannot approach the public markets to raise capital. Again, you are not big enough to go in for a bank loan or a debt offering. It looks like you are stuck with your idea with no means of making it a reality.
Private equity is one way out of this logjam. Private equity can be in the form of angel investing, equity crowdfunding, venture capital and other seed funding options. Let me talk about Venture Capital Funding. Venture capital targets early-stage and emerging companies in high technology industries such as biotechnology and IT with innovative technologies or business models.
You will be able to trace venture capital investments in India to the late 1980s, when the Technology Development and Information Company of India Ltd. (TDICI) was formed. The investment pattern kept increasing till 2001 and then declined drastically. Since 2006, venture capital investments have been steadily increasing with a surge starting from 2010 (An Analysis of Trends of Venture Capital and Private Equity Investments in India (V. R. Jyotsna Kumari).
As an entrepreneur you may be interested in information related to startups and their funding sources. This can be accessed from the Indian Startup Funding And Investment Chart  site. In general, venture capital funds invest in companies in exchange for equity. If you are concerned about their legitimacy or dependability, all venture capital funds must be registered with SEBI. Their sources of funds are financial institutions, foreign institutional investors, pension funds and high net-worth individuals like Ratan Tata. You would have heard about his involvement with some startups.
You may want to investigate various venture capital funds being promoted by central government, state government and public sector banks. Two funds by Small Industries Development Bank of India (SIDBI) were launched in August 2015, India Aspiration Fund (IAF) and SIDBI Make In India Loan For Enterprises (SMILE) scheme. Is this a positive sign for entrepreneurs? As stated by Union Finance Minister, Mr. Arun Jaitley:
India is witnessing a start-up revolution and to harness the potential of India’s innovators and entrepreneurs a vibrant financial ecosystem is essential. The IAF is intended to play a vital role in this financial ecosystem
Let me familiarize you with the process that is normally followed by these venture capital investors. This is a six step process from origination till exit.
Every venture capital investor has a set portfolio of industries in which they will invest. You can find this out from sites like Top 47 Most Active Venture Capital Firms In India For Startups. Based on their portfolio they will entertain deals from referrals, active search systems and intermediaries.
Next, is a screening process that they initially do before going in for a thorough study. It will help to find out the broad level criteria used by an investor to initially screen applications. Factors like the size of investment you are looking for, the stage at which you are looking for finance and your geographical location could be considered by your prospective financier.
Once you have gone past these two steps, you are in for an in-depth evaluation by the venture capital investor, referred to as “due diligence”. You must be ready with an exhaustive list of information to provide to the venture capital investor. Prepare a profile of yourself and your business venture where you must be able to establish integrity, long-term vision, growth orientation, managerial skills and commercial acumen. Document the characteristics of the product, market and technology to showcase the innovative technology and business model. Have a well researched business plan with an estimation of the risks and returns on investment. Your investor would like to know about the risks and returns so that he has full understanding about the trade-offs involved.
Now, you come to the nitty-gritty of what is called deal structuring or the terms of the deal. You will need to work out things like how much control the investor will have over the venture, buyback options, acquisitions, initial public offerings (IPOs) etc.
In the post investment activities, the investor will support you like a partner or collaborator. Depending on the deal structure, the investor may get involved in shaping the direction of the venture. However, it will be advisable to keep the responsibility of day-to-day operations with yourself. If you want to have management control over the venture, do not allow any kind of financial or managerial crisis to crop up. The investor may decide to get involved and revamp the management team.
Finally, we come to the exit. Usually, a venture capital investor prefers to come out of an investment between five to ten years. They prefer to cash-out their gains at the earliest opportunity, which may be in the form of IPOs, acquisition by other companies or purchase of the investor’s shares either by the promoter or by an outsider.
You will find a whole lot of information on various aspects of venture capital funding on the Internet. Venture capital investment in India has grown exponentially over the past eight-odd years and along with it has grown the amount of investment that these investors are willing to commit. Most venture capital firms are searching for their Unicorns, companies with a valuation of $1 billion or more, such as Uber, Xiaomi, Airbnb etc, and in India we have Flipkart, Quikr, Olacabs etc.
If you are an entrepreneur, go for it, you may be one of the future Unicorns.
Indian Startup Funding And Investment Chart . 2016. http://trak.in/india-startup-funding-investment-2015/
Govt launches new $305M VC fund under SIDBI. 2015. http://techcircle.vccircle.com/2015/08/19/govt-launches-new-305m-vc-fund-under-sidbi/
V. R. Jyotsna Kumari. An Analysis of Trends of Venture Capital and Private Equity Investments in India. 2015. http://www.serialsjournals.com/serialjournalmanager/pdf/1436336173.pdf
D. Aruna Kumar. The Venture Capital Funds in India. 2005. http://www.indianmba.com/faculty_column/fc159/fc159.html
Team Inc42. Top 47 Most Active Venture Capital Firms In India For Startups. 2014. http://inc42.com/resources/top-47-active-venture-capital-firms-india-startups/
CB Insights. The Unicorn List: Current Private Companies Valued At $1B And Above. https://www.cbinsights.com/research-unicorn-companies