How venture capitalist acts as a catalyst for startup ecosystem

The startup ecosystem in India has been thriving. While the pandemic forced many businesses to go bankrupt worldwide, the startup ecosystem in India has been working in full force and thriving. Fostering innovation and entrepreneurship and being at the forefront of technological changes have enabled India to steer ahead, and Venture Capitalists have played an integral part in this growth journey. 

Startups, known to be fast-growing companies, Venture Capitalists (VCs) invest in them. Most founders require extensive capital at strategic times to build companies and VCs bridge this gap. They invest in companies for shares, also known as equity. Most startups use cutting-edge technology to disrupt existing industries and solutions. Since startups build innovative products or solutions, they need a lot of time and money to build, launch and scale their products. Achieving this feat without a venture capitalist backing them is hard to imagine and almost impossible to achieve. 

The venture capital industry emerged in the USA in the 1960s when several venture capital firms were formed on both east and west coasts. All these firms were structured as Limited partnerships. But venture capital as an asset class took off in the 1970s when more money started flowing in, and more firms were formed in the USA. The Venture Capital industry and VCs have come a long way since then. The industry has become global, and the funds have become more significant. Now the most prominent VCs don’t hesitate to write cheques worth hundreds of millions of dollars, something unthinkable a couple of decades ago. Venture-backed companies are staying private for a longer time than before. VCs are comfortable investing hundreds of millions of dollars in these companies because they understand building world-class tech products can take years.

Most VCs play the long game. If venture capital didn’t exist, we would have lost out on some of the most innovative companies. Imagine a scenario where a big problem needs fixing. The current solutions in the market are terrible. You know you can build a better product and have the skill sets to make it. Unfortunately, you don’t have money. You can’t go to banks because banks don’t lend money to companies that are starting out. At this time, you need someone who understands the potential of what you are building and is willing to back you. This is where VCs come in. They fathom the possibilities and are eager to invest time, money and other resources. Suppose their understanding and instinct turn right, and they can build something. In that case, VCs can sell their equity to other investors for a hefty profit. If you fail, you don’t have to pay back this money. 

There’s a more brutal side of venture capital. A majority of startups that can convince VCs to back them fail. VCs know that the chances of failure are extremely high before they invest in any startup. Hence, they invest in those startups that can, in theory, give them 20-30x return. They are always on the lookout for home runs. These companies plan to disrupt existing business models and create new products.

Although, we may hear a lot of stories that getting funded is hard for an entrepreneur, the reality is there has to exist an investor-investee fit. Not all ideas are fundable. One can make a nice, profitable business selling T-shirts but creating a truly massive company like Zara is tough. VC’s have to look at a lot of factors before backing a company. There has to be some tech driven innovation backing the T-shirt business; either on the supply side or the demand side which can help the company scale up rapidly. Good VC’s back innovation. 

In most cases, this means using computing and internet technology in some form. These are the companies that have a high risk of failure. But they also have the potential to become massive and change their industry or create a new industry, for example, Google and Amazon.

Since VCs operate in a high-risk reward environment, they are always at the forefront of technology. They understand the power of technology to change the world. They help visionary founders to build companies that change the status quo. Most founders will need VCs to set up world-class companies, and the pace of change will be slow. VCs quicken the innovation by funding it. 

Due to the boom in the startup ecosystem in India, Venture Capital is also booming. A lot of funds have been successfully able to deliver good returns for their investors. They also help generate wealth across the spectrum, for investors, employees, consumers, founders, etc. Impact focused funds also aim to bring about positive non monetary changes, for example, the environment. More and more HNI’s are looking at it as an emerging asset class and creating an allocation for outsized returns, they also want to be a part of the India growth story. VC’s are able to raise larger India focused funds than ever before and probably have the highest investing capacity right now. They are actively looking to deploy these funds in the next generation of cutting edge ideas and technologies. It has never been easier to get funded. If your idea is good and the company is doing well, then there is no dearth of investors. The question that entrepreneurs now ask is “how can the investor add value to my company” rather than “can I get funded”. This is a pivotal moment for VC’s as they have to re-invent themselves to support their investments. This would be the next set of catalyst that would move the startup ecosystem forward.

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