Author :- APOORVA KUMARI
College and Year :- BANASTHALI UNIVERSITY, 4th Year
In this paper we look at the effect of COVID-19 on venture capital investment where we will understand the meaning of venture capital investment as a private investment made into startup companies with a potential to grow need a certain amount of investment. The SEBI also defined this term where it simply says that it is a fund of a company which raises money through loans, donations, issues of securities or units to make its investment. We will discuss the origin of venture capital by the father of venture capital and will also discuss its origin in India through ICICI and we also know the recent scenario of venture capital in India. Then we will discuss some examples by which we can understand the actual meaning of venture capital investment. After that we will discuss it feature that will define the whole venture capital. And then we will discuss the process of venture capital financing in India by which steps we will easily understand how to do venture capital and how it is beneficial for small enterprises as well as medium enterprises.
Then the main topic which we have to understand that the effect of COVID-19 on venture capital investment will discuss by the help of some data analysis which tells us about the condition from 2019 to 2020. And lastly we will discuss why the venture capital investment is important because the pandemic damage everything and also damage the venture capital. Is COVID-19 really gave effect on the venture capital?
So, this question will discuss in the main article.
Key words: venture capital, funds, investment, risk, money, COVID-19, companies.
1.1 Meaning of Venture Capital Investment:
The word venture capital investment refers to a private institution which made into startups companies with potential to grow need a certain amount of investment. It is also known as the term risk capital and potential risk capital because the term itself explains that it includes the risk of losing the money. It also represents the financial investment with highly risky amount of money to get the high rate of return. Basically, it is the most suitable option for the companies and businesses which has higher amount of capital. The investors who invest their money in this type of business to startups the companies with a potential to grow because it is just like share equity not as type of loan. Although, it can be a risky deal for the investors who invested their funds in this but it is becoming essential for the new companies for raising their capital. However, it does not always take a monetary form but it can also be provided in form of technical and managerial expertise. It is typically allocated to small companies whose need is to grow and expand themselves. In a venture capital investment, large ownership companies are created and sold to a few investors through independent limited partnership that are established by venture capital firms.
The SEBI defined venture capital funds in its regulation as ‘ a fund established in the form of a company or trust which raises money through loans, donations, issues of security or units as the case may be & makes or proposes to make investments in accordance with the regulation’.
1.2 Examples of Venture Capital Investment:
Kohlberg Kravis & Roberts (KKR)
This name is well known to all of us as the top investment company in the world who entered into an agreement to invest $150 million in JBF Industries Ltd. (Mumbai). The KKR firm will acquire 20 percent stake in JBF Industries and will also invest in zero-coupon compulsorily convertible preferences shares with 14.5 percent voting rights in their own company who wholly owned subsidiary JBF Industries Ltd. The funding amount provided by KKR will help JBF to complete ongoing projects.
India’s largest online furniture company has raised $100 million in a fresh round of funding led by Goldman and Sachs and Zodius Technology Fund. Pepperfry will use the funds to expand its sales in every city by adding to growing its delivery vehicles. It will also open new distribution centres and expands its carpenter and assembly service network. This is the large quantum of investment raised by a sector focused e-commerce companies in India.
2. FEATURES OF VENTURE CAPITAL INVESTMENT
2.1 HIGH RISK: As already written in the meaning of venture capital investment that high risk is one of the most important features of this. Usually the companies which have new ideas or technology for the growth of their company and also the small or medium companies adopted this investment because this investment represents a financial investment in a highly risk project with the objective of earning high rate of interest. Even the big companies like Facebook are also the example of venture capital startup with highly risk project.
2.2 FINANCE NEW COMPANIES: The companies which have venture capital investment of huge amount also finance the new companies which are basically a finding of capital market in their early stage to free from difficulties.
2.3 LONG TERM INVESTMENT: Mainly the venture capital financing is a long term investment and made in companies which have high growth potential because it generally takes a long period to encash the investment in securities made by the venture capital. The provision of venture capital will bring rapid growth for the business.
2.4 EQUITY PARTICIPATION AND CAPITAL GAINS: Venture capital investment is invariably a potential equity participation wherein the objective of venture capitalist to make capital gain by selling the shares once the firm becomes profitable. It participates in startups by buying equity in startups. As the venture capital industry develops its equity such as debenture which has become a venture capital investment.
2.5 SUPPLIER OF VENTURE CAPITAL PARTICIPATES IN THE MANAGEMENT OF THE COMPANY: To provide capital, venture capital funds take an active participation in the management of the company which can be says as the venture capital combines the qualities of the banker, stock, market investor and entrepreneur as the management of the company.
2.6 LACK OF LIQUIDITY: Venture capitalist buy into startups as small companies which simply means when they have lack of liquidity and the venture capitalist cannot easily divest if things are looking bad for the startup.
3.VENTURE CAPITAL INVESTMENT PROCESS
3.1 DEAL ORIGINATION: Origination of a deal is the first step in any financing. It is not possible to make an investment without a deal and in venture capital deal are referred by the business partners and business organizations.
3.2 SCREENING: It is the second process in which the venture capitalist scrutinizes all the projects in which he could invest because he has to know about the market scope, product size, financial condition of the company.
3.3 EVALUATION: At this stage, the capitalist should study the documents in which he knows about the track record, future turnover and on that basis he should evaluate the capacity of that company.
3.4 DEAL STRUCTURING: In this stage, capitalist would finalize the terms and condition of the deal by which both get benefit and both the parties fix the amount of investment, percentage of profit.
3.5 POST INVESTMENT ACTIVITY: When the deal is finalized then venture capitalist also becomes the part of venture and he has certain rights and duties in which he has a right to participate as a representation in the Board of Directors.
3.6 EXIT PLAN: This is the last stage in which they had to make plan of minimal losses and maximum profit.
4. EFFECT OF COVID-19 ON VENTURE CAPITAL INVESTMENT
As we all know this pandemic COVID-19 changes everyone personal as well as professional life in every aspect so the venture capital investment is also not exempted from that. The sudden arrival of this pandemic has affected global economy and venture capital flow also decline. This scenario says that it must be the locked up of global venture market. VCs report that during pandemic their investment pace falls down 71 percent from the normal. Just few weeks ago venture companies have shifted from seeking new paths to growth. Many companies and investors must make decision whether to raise money or delay the funding plans. Because of this pandemic funding money and private companies’ valuation will decline. Most entrepreneurs who have raised funds from the venture capitalist says that the time between making a pitch and signing the deal is about to six to nine months when VCs have doubt about the market opportunities or the startup business models. In normal times, deals announced today would have been in the works possibly for at least 3 months. Approx half of the VCs’ company being affected by the COVID-19 and surprisingly there is a little change in the allocation of their time. The bulk of VC investors plans to do new deals but due to this pandemic they were enjoying the vacation of lockdown at their home.
4.2 DATA ANALYSIS:
Interpretation – This is a scenario of VC investment from January 2019-June 2019 to January 2020-June 2020 where there is a huge lost of Indian startups because in January 2020 the first case of corona virus came in India and till the second half of March government didn’t take any measure but after on 22nd March lockdown started then the companies condition declines because of continue lockdown till June. The amount invested in January to April 2020 to May was about to one-fourth of invested in May 2019.
Interpretation – This is the scenario of every business sector whose condition of venture capital in 2019 is positive and in 2020 every business’ condition is in negative which automatically shows the loss of investment in various sectors.
4.3 NEED OF VENTURE CAPITAL INVSTMENT:
We all knew that due to COVID-19 everything’s condition is damaged but we are also aware with this fact that the venture capital is very essential because innovations and entrepreneurship are the kernels of a capitalist economy which are totally based on it. New businesses, however, are often highly risky and cost intensive ventures and that’s why external capital is often sought to spread the risk of the failure in return for taking investments, investors in new companies are able to obtain equity and voter rights. So, for this purpose we need to understand that these are the following reasons by which capital venture investment is needed even at the time of COVID-19:
- It promotes entrepreneurs because they are like scientist who converted their technical commercial skills in venture capital investment.
- It encourages customers because through venture capital financial institutions provide finance to them.
- When the financial institutions takes help with venture capital they also promote modern technology to encourage their capital.
- By promoting new entrepreneur and encouraging customers it automatically helps in growth of the economy.
- Many companies who are sick and small due to their low capital then venture capital provide funds to them.
By discussing all these things we are able to understand that what is venture capital and what is the effect of COVID-19 on venture capital investment but we also discussed that it is important so I would like to suggest that the venture investments are affected by the pandemic but the investors as well as companies must be prepared to negotiate with this because their investment’s condition also says that there is a huge risk in it and it is obvious that there will be a rapid change in market condition so they will have to prepare for the balancing of their losses. However, the VCs will be focused on both success and failure and they have to plan accordingly and as per my point of view there is no need to blame this pandemic. I’m not saying that this pandemic didn’t affect anything… yeah, it actually affects the whole economy but when we talk about venture capital investment the most important feature is high risk so investors have to prepare for this according to the rapid change in market.
From the above discussion here we may conclude that venture capital investment is a private institutional investment made to startup companies at early stage. Venture capital funds are the investment made by the investors who seek private equity stake in small to medium business which are potent enough to grow. SEBI also defines it in a very precise manner. Along with that we also discussed how KKR and Pepperfry.com invest their funds in it. Then we discussed there are some important features by we can understand the meaning of VC and after that we discussed the process by which any venture capitalist invests their funds in it. And after that we understood that how this COVID-19 pandemic affects the venture capital investment also with the help of some data analysis and then we discussed why the venture capital investment is important for the economy or the country. And lastly I suggest some points related to the effect of COVID-19 on venture capital investment.