India’s VC funding grew four-fold in 2021
Individuals with a business idea or a new technology often have a hard time raising funds due to the high risk involved during the onset of a business. Investments or credit for founders on comes with high rates of interest from banks and a great deal of hesitance especially if there are no hard assets against which the debt can be secured. Besides, several regulatory constraints and operating practices act as hindrances for investment banks and public equity.
In the US for instance, companies cannot access public markets without sales of about $15 million, assets of over $10 million, and a fair track record of profit-making. Despite lowering the threshold for the development-stage businesses, channels of cash inflow for companies with less than $10 million in revenue remains narrow.
In situations like these, venture capitalists can truly help businesses develop their products/serciveces and go to market. Venture capitalists are private equity investors who provide capital to companies with high growth potential in return for equity stakes. Venture capitalists can choose to invest in startups or small companies that are looking to expand but have little or no access to equity markets.
Venture capitalists may not always fund businesses from the onset. More often than not, they are drawn to organisations that are at the state of commercialising their idea. Once they buy a stake they actively participate in the growth and cash out with a good ROI when the time comes. Some parameters they look for in companies before investing include a strong management, strong competitive advantage, unique product or service, and vastness of the business’s market potential. They may also invest in companies that already operate in sectors they are familiar with to be able to influence growth and decisions better.
Who exactly are venture capitalists?
Venture Capitalist firms consist of partners who invest in a venture capital fund, guided by the framework of limited partnerships. The fund itself is handled by a committee that makes investment-related decisions. At times, pension funds, foundations, corporate pension funds, insurance companies, foundations, and high-net-worth individuals may pool together their funds to be controlled by venture capital firms. Though all partners own part of the fund, it is the firm that decides where the funds would be invested. The firm picks investment opportunities based on what most banks or capital markets would consider high-risk investments.
Growth in India’s venture capital space
According to Bain & Company’s India Venture Capital Report for 2022, venture capital deal value peaked at $39.5 billion in 2021 – growing 4x times in a single financial year. As India’s startup ecosystem reached an inflection point, the total number of deals grew two-fold from 809 in 2020 to 1,545 in 2021. The average deal size too saw a jump from $12.4 million to $24.9 million.
The multiplier effect was also felt strongly within the startups with 44 startups in India reaching unicorn status with a valuation to the north of $1 billion dollars. Some of the key drivers could be attributed to the development of digital infrastructures like cheap access to data, UPI, eKYC, and Aadhar. This opened up huge opportunities for economic growth, enabling India’s startup ecosystem. Additionally, investors have rebooted their confidence with public listings gaining momentum. Lastly, regulatory crackdowns in China too diverted some investment flow towards India.
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