BY SUMEHARDEEP SINGH REKHI
It won’t be wrong to say that venture capitalism or venture capital can be viewed as the savior of Startups but yes it also won’t be right to view venture capitalism as the SELFLESS savior. So, if venture capital is not the savior that it was supposed to be then why does this exist in the first place?
Now to answer that question first we need to know what actually is Venture Capitalism?
Venture capitalism can be called a process of investing money into startups having long-term growth potential by wealthy businessmen. In simpler words, all the startups need large sums of money to foster their idea and develop their idea so the large amount of money required is given by wealthy businessmen or venture capitalists in the form of investment if they see that the startup has the growth potential in the long-run with respect to certain terms and conditions.
People while understanding the concept of venture capitalism tend to confuse it with the concept of Angel investors, that is because Angel investors are also related to the concept of investing in startups but there lie 2 serious differences between both these concepts which are –
Angel investors operate individually whereas Venture capitalists work under a firm.
The offers by the angel investors are mostly limited to only providing financial assistance whereas the venture capitalists focus on a more serious and long-term relationship offering all sorts of assistance whether it be providing them with a team having expertise in a particular field or help in managing the startup, venture capitalists also focus on seeking a strong and competitive product with promising market potential.
Venture capitalism is not always a one-way road i.e. even though venture capitalism in many situations and cases results to be beneficial, Venture capitalism also has its loopholes. In the development of most startups, venture capitalism or venture capitalists play a pivotal role from helping in managing an expert team to suggesting different decisions for the benefit of the startup or providing the team or individuals with certain areas of expertise for managing the startup.
This process or the so-called help mostly plays well but these benefits come with a cost and that cost can come in different forms for one the investors become part-owner of the company which makes the owner lose autonomy and control of his own company, these investments can grant the investors power to disrupt the decision-making power of the owner, not only that this form of investing is an uncertain one and the benefits of this can only be realized in the long run. Other costs can include the uncertainty of this type of investment and the complexity of this process.
There have been many successful startups that are results of Venture capitalism like:
Xiaomi which was backed by Morningside Ventures and after the company went public in 2018 at a valuation of $54billion Morningside ventures got a return of more than 40times their investment.
Flipkart which was backed by Accel Partners, made Accel around $1.1 billion dollars in 10 years on an initial investment of $800k dollars in 2008 after the company was bought by Walmart in 2018 for a whopping $16B dollars.
Spotify was backed by a Sweden VC Creandum with a total investment of $4.5 million dollars in Spotify for a 6 percent stake which a decade later gave back 80 times more return on their investment, The 6 percent stake at their exit was valued at a whopping $370 million.
Dropbox which was a file-sharing startup had a $12.7Billion dollar valuation at its IPO in March 2018 which made a whopping $2B return on the investment by Sequoia Capital.
The examples of Venture capitalist backed successful startups does not end here we also have startups like Uber, Coinbase, etc. in line but even after seeing so many successful examples we cannot ignore the startups which failed and took the VC`s money along down the road like:
Shotang which at its peak had a 40million market valuation and it had raised $864k from Patamar Capital and $5million from Exfinity Venture Partners in 2015 but it failed because reported it had used the money raised to pay off creditors and its employees and also probably due to the stiff competition with giants like Flipkart, Amazon, etc.
Tazzo Technologies which was a bike rental startup despite getting a seed fund of $225k by DSG failed because of its non-profitable and capital-intensive nature.
Monkeybox was a Blume Ventures backed startup which failed because of fierce competition in the food-tech sector and also because of revenue slowdown. However, the funding amount wasn’t disclosed
The list of unsuccessful startups is probably longer than the successful ones. The reasons for failed startups can be numerous, sometimes it is because of poor management sometimes it is lack of funding and sometimes startups just run out of luck even with everything on the line.
CONCLUSION
Apart from its loopholes venture capitalism has been a diamond jewel for the rise and development of the startup market. Numerous startups had got the taste of venture capitalism like pepperfry.com which was able to raise 100 million USD that would be used to increase their reach in tier 3 and tier 4 cities and also will be setting up new distribution centers. Though the benefits of venture capitalism are unmatched, we cannot ignore the fact that this diamond jewel can also take the form of glass with a shiny surface but with a very weak foundation.
ABOUT THE AUTHOR
Sumerhardeep is a student at Kirori mal College ‘Delhi university pursuing B.A. Programme with a focus on MBA from an Ivy League school in near future. Quick thinker, Humor, Team player, and leadership are the words that he likes to use to define himself, apart from his interest in researching and studying the various branches and ongoing heated topics of the finance and investment sector, he has always have had a thing for football and basketball though COD remains his first love. In his words “I am an Average kid with the goals and aspirations of a prodigy”.
Disclaimer: The views expressed in this article are the author’s own and do not necessarily reflect the views of the organization.
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