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Venture Capital and Angel Investors
Venture capital and angel investors both are sources of funds which businesses especially startups go for. So when we talk about both the sources, they are long term as well as external source of finance for an organization.
Startup culture has seen a boom around the world including India. There were more than 1200 startups which emerged in 2018 in India. Total of 8625 startups have been recognized till 30 March 2018. The funding saw a growth of 108% from $2 Billion to $4.2 Billion. Large chunk of this is contributed by angel investors and venture capitalists.
These startups contribute in great numbers towards the growth of economy. They also help in providing thousands of job opportunities to many individuals in the country. As India is in the phase of the jobless growth, startups have great role to play to get India out of this situation.
Venture capital is an investment made by private institutions (Fig) into new ventures or startups. These are the institutions that are willing to take risk in return of some reasonable gain. The people investing the amount in the startups are called ‘Venture Capitalists’. He/she buys the shares of that company and then becomes a financial partner in the business. It is quite a risky move for venture capitalists as they can lose their money if the business fails. Mostly investors provide funds to startups, businesses with expansion plans, troubled ventures etc.
New companies find it difficult to source funds and they have to go through a lot to even get loans or credit from the market. Hence venture capital has become one of the most popular sources among the startups.
Methods of Venture Capital
- Participating Debentures
- Conditional loan
Features of Venture Capital investments
- High Risk involved
- Lack of Liquidity in investments
- Long term horizon
- Equity participation and capital gains
- Venture capital investments are made in innovative projects
- Suppliers of venture capital participate in the management of the company
Angel investors are those persons who invest in entrepreneurial projects and startups. They don’t necessarily need to be a millionaire. One might know them or one might not. They can be your relatives, doctors, lawyers etc. They are not just here for the sake of the profit but also for their overall satisfaction. Angel investing has seen some soaring numbers in few years. This is mainly attributed to less risk takers in the market. (Fig)
They are also people who are willing to take risk and demand little or nothing in return. They just want to be a part of the business for long term. There are two types of angel investors: Affiliated and Non-Affiliated. Affiliated angels are those who are known to us or are close acquaintance. Non-Affiliated are the ones who are unknown to us and have no connection with the business.
Types of Affiliated Angels:
2. Business Associates
- Suppliers/ Vendors
Types of Non-Affiliated Angels:
- Middle Managers
- Business brokers
Justification of the topic:
Venture Capital and Angel Investors:
The increasing capitalism and growth of technology has made the investments by venture capitalists and angel investors as a blessing for people with great ideas. Now, in this 21st century, if a person has a great idea in his mind and a will to execute it, he no longer needs a strong financial background as a prerequisite. Presently, there are many people in the market who are ready to invest in a idea which will fetch profits for the stakeholders.
Why venture capitalists and angel investors are important?
Venture Capital is important because it:
- Promotes Entrepreneurs
- Promotes Products
- Encourages Customers
- Brings out latent talent
- Promotes Exports
- Acts as Catalysts
- Creates more employment opportunities
- Brings more financial viability
- Helps Growth of economy
- Helps Sick Companies
Angel Investors is important because it:
- Operating and investment expertise
- Capability to tolerate high risk
- Personal and emotional bond with the company
- Seeking Entrepreneurship perspective
The above diagram shows the motives of angel investors in France. These motives can differ from country to country but they don’t differ much. And, as we can see that value addition is the main or major motivation for investments and not profit.
As we can see from the above diagram, how important is infusion of funds by either venture capitalists and/or by angel investors (Hence forth VC and AI). There is an upward movement and exponential growth in the graph from initial stage to later stage with the help of VC and AI.
Raising capital from angel investors is basically engaged at building the item and administration. The cash raising here is less mind boggling as its dependent on close to home solace of the speculator that implies quicker choices, straightforward investor agreements and shorter due steadiness. These people for the most part don’t have a board situate also.
They look at ten*x returns within a time frame of three to five years. There risk is pretty high as they invest at very early stage of business.
The ticket size of VCs is to the tune of least $2-3 million as they hope to contribute for fast development and extension of these organizations. Financial speculators are proficient financial specialists having bigger duty towards their partners. The procedures are extreme and thorough. VCs complete a strict due industriousness and draw lines as and when required. The greater part of the VCs don’t settle on the choice themselves its determined principally by a gathering of individuals of their firm who together accept an approach the venture. They will have a reasonable authority over your business and will screen it intermittently (as a result of their trustee obligation towards their speculators) and prone to pick up a seat on the board.
Angel investors and VCs regularly search for 10x returns or 20%-30% yearly on their venture made. They by and large have a multi-year time allotment for an exit. It additionally relies on the development/association and numerous different components.
The funding business in India has developed in the last six to seven years. There are four kinds of investment finances working in India:
(1) International supports that have raised their whole capital outside of India in dollars.
(2) Indian subsidizes that have raised their assets essentially outside of India.
(3) International finances that have raised vast sums from Indian financial specialists.
(4) Indian Funds that have raised their assets essentially from Indian financial specialists.
The worldwide gathering pledges condition for investment reserves has just gotten harder in the year 2017. Assets that have the 2006 to 2010 vintage were required to return significant capital in the year 2017. Given the way that new ventures just lessened in India, the ways out were rare. At the large scale level, over $100 billion has been put resources into India in the elective resources class and under $40 billion has been come back to the financial specialists up until this point, despite the fact that $2.77 billion was come back to speculators in 2017, up by 56% over the earlier year. Except if speculators see the cash returning to them, they won’t get the certainty to put more cash into India. One may contend that the general interest in the PE/VC space in India has contacted an unequaled high in a solitary year at around $22 billion in the initial 10 months of the year. In any case, greater part of these ventures occurred through eight expansive arrangements. In correlation, China saw an a lot more elevated amount of arrangement movement with 2,155 arrangements in PE/VC space adding up to $218 billion speculations just in 11 months of 2017. This was up nearly 8% from the earlier year.
At the equivalent, one needs to understand that India has begun understanding investment as of late. It was just in 2013 that SEBI characterized three unique classes of elective venture classes of AIF1, 2 and 3. Before that, it was all VCF (investment reserves), independent of the size or stage or focal point of the assets. It was just in 2015 that the Narendra Modi government propelled the Start-up India/Stand-up India activity, recognizing new companies to be the standard concentration for business age and improvement of the economy. It was over the most recent three years that the Rs10,000 crore finance of-reserves corpus of the legislature began getting pushed towards funding ventures.
The real features of investment industry in India which has demonstrated the development and advancement since 2012-2016 in following heads are as:
1. Aggregate estimation of VC interest in 2016 was USD 15.0 billion out of 620 arrangements.
Figure 1: PE/VC investment by year Source: Venture intelligence: India private equity trend report
2. Data innovation part pulled in most extreme VC ventures (22.3 percent of the aggregate arrangement esteem and 56.6 percent of the arrangement volume), trailed by money related area (30.8 percent of the aggregate arrangement esteem and 8.7 percent of the arrangement volume).
Figure 2: Share Of Investment (By Value)
Source: Venture Intelligence: India private equity trend report
3. India had developed as one of the world’s biggest beneficiary of FDI and FDI was running at a yearly rate of USD75 billion out of 2016-17.
Figure 3: Source of FDI in India Source : Fourth Wheel 2017
4. Western India represented 46% of aggregate interest as far as esteem
Figure 4: Investment by region (value) Source: Venture intelligence: India private equity trend report
5. PE/VC exits in India declined by 18% to $7.86 Billion (crosswise over 215 arrangements) amid the schedule year 2016.
Figure 5: PE/VC Exits in India Source: Venture intelligence: India private equity trend report
The idea of investment began in USA in 1950s when the capital magnets like Rockfeller Group financed the new innovation organizations. The idea wound up well known amid 1970‟s when a few private ventures began financing very unsafe and exceedingly compensating undertakings. The American Research and Development was framed as the primary endeavor association which financed more than 100 organizations and made benefit more than multiple times its venture. From that point forward funding has grown‟ tremendously in USA, UK, Europe and Japan and has an essential commitment in the monetary improvement of these nations. The development and advancement of investment in different nations is featured underneath:
USA: The advancement of VC occurred in 1958 when the business organization Act was passed by the US congress. US involved about 54% of the aggregate worldwide VC interests in 2016. The more develop VC markets of the US support earlier– arrange ventures and the fundamental leave course for VC-upheld organizations is acquisitions (M&A), speaking to over 90% all things considered.
UNITED KINGDOM: It was just in the mid 1980s that it started to create and grow when the British government made arrangements for expense discount to individuals for making interest in unlisted organizations in the stock trade, under business extension plot. Funding is assuming sensationally imperative job by helping Early-organize quick development organizations to convey the advancement which is assisting Uk economy with improving and develop. Today, it is a world pioneer in the money related innovation (fintech), endeavor innovation, web based business, property, and travel segments. In 2016, 936 arrangements were finished, conveying €4bn in ventures speaking to 34% of all arrangements finished in Europe. The UK has the most astounding centralization of capital in Europe and a huge wellspring of assets for rest of the mainland.
—– Amount raised (€billion) —– No. of rounds
Figure 7: Venture Capital Investment
Source: 2016 European venture capital report
CANADA: In 2015, a sum of CAD 2.7 bn in funding was put resources into Canadian organizations. The volume of Canada‟s VC speculation as a level of GDP positioned third among other created countries – at 0.08% of GDP. By part, firms in data and correspondence advances (ICT) have caught the biggest offer of VC interest in Canada (63%).
EUROPE: VC firms situated in the EU financed in excess of 28,000 youthful organizations giving an aggregate of EUR 35 bn in investment from 2007 to 2015. All things considered, VC firms put EUR 1.3 m in organizations situated in the EU in each subsidizing round. € 16.2B funding is brought by European organizations up in 2016.
FRANCE: The investment action in France came into picture in 1971 with the making of the Societies Financiers Innovation. In spite of the fact that the French VC showcase endured amid the monetary emergency of 2008– 2009, raising support has fundamentally ascended since and ventures are required to increment in the coming years. With the end goal to make a private VC industry in the seed portion, the French state chose to make an EUR 600 m “store of reserve” program, devoted to financing seed VC assets, in 2011.
GERMANY: Like France, Germany has a solid convention of government bolster for the business division that goes back to the post world war II programs committed to modifying the German business. Today, Germany is Europe’s second biggest investment showcase after the UK.
JAPAN: Investment financing in Japan was basically begun in 1970‟s when the posting standards were loose along with enrolment prerequisite of the stock trade. The development of OTC in 1982further added force to the development of funding in Japan .In Japan the endeavour speculations are essentially value made in more develop privately owned businesses. Ordinarily the funding firms in Japan don’t put resources into new companies.
SINGAPORE: Singapore is a noteworthy speculation centre with Singapore-based reserve chiefs representing over 55% of aggregate private value and funding ventures into Southeast Asia. There are around 153 investment firms. VC interests in Singapore accomplished notable figures with 100 manages a total estimation of $3.5b recorded in 2016. As indicated by a report by worldwide valuation firm Duff and Phelps, the innovation division represented the greater part of arrangement volume at 53% and bargain an incentive at 34%.
CHINA: In China, the industry developed in 1999-2000 couple with the development in the IT area. Funding markets of China by and large lean toward less hazardous later-arrange organizations. In China IPOs speak to by far most of ways out for VC-sponsored organizations .VC financing has grown seven crease over the most recent five years in China. In 2015 aggregate subsidizing of US$49b through 1,635 arrangements is there when contrasted with US$7b in 2010. In the meantime, bargain measure has multiplied from US$15m in 2010 to US$30m in 2015.
Holy messenger venture has been a trendy expression in start-up circles for a couple of years now. New companies appear to be anxious to get heavenly attendant financial specialists. However, the quantity of holy messenger bargains has dropped from 876 of every 2016 to 433 out of 2017 as indicated by VCCEdge Data.
With a 29% drop in tech new companies’ examples of overcoming adversity, a general deceleration of recently dynamic new businesses in India has likewise been noted as of late.
At present, there are more than 1000 dynamic Indian blessed messenger financial specialists whose ability to contribute is evaluated at $1 billion dollars every year.
Speculations by Industry:
Several years prior, the blessed messenger speculator network basically involved CEOs from MNCs or even proprietors of fruitful organizations. Also, their speculations for the most part stayed in the IT segment. In any case, that standard doesn’t really apply any longer. These days, an expansive number of holy messenger financial specialists are occupied with an assortment of segments including interchanges, coordination’s, medicinal services, travel, and nourishment.
Conveyance of Investments:
2017 finished with an astounding $13.7 million worth of interests in Indian new companies. This sum is an expansion from the earlier years. Regions that saw a decent number of arrangements were Agritech, Analytics, CleanTech, IoT and Gaming.
Despite the fact that the numbers are empowering, in all actuality, start-up goliath, Flipkart, represents 70% of the aggregate speculation esteem. Barring the billions raised by Flipkart, Ola, Paytm and Renew Power, new businesses in Bangalore and Delhi-NCR pulled in the majority of alternate speculations.
efficient type of heavenly attendant contributing just started around 20 years back – and holy messenger bunches just started to rise after 2000. Today, the U.S. has around 300,000 heavenly attendants and around 400 dynamic blessed messenger gatherings.
In spite of the fact that the aggregate size of the holy messenger venture showcase in the U.S. can’t be estimated unequivocally (on the grounds that numerous speculations are made on an individual premise and in this manner are not expose to exposure rules), gauges show that blessed messenger ventures have since quite a while ago outperformed funding speculations and keep on developing. Reviews by the Center for Venture Research at UNH show that the aggregate U.S. heavenly attendant market developed from $17.6B in 2009 to $24.1B in 2014. Considerably more sensational is the ascent in holy messenger contributing far and wide – in Europe the aggregate market multiplied amid the previous five years and in Canada it tripled.
Angels are becoming increasingly comfortable investing alongside institutional investors (and vice versa).
Angel groups are rallying together to meet entrepreneurs’ funding needs in capital-starved geographies. So what does this mean for entrepreneurs? Keep your relationships with angel investors strong. They are more than just initial funding, and can be the facilitators of future rounds and growth.
As a data point on angel groups rising in undercapitalized markets, check out the chart below showing the 12 most active angel groups. Notice how many of them are outside the traditional hubs of venture capital.
Many researchers confirm that angels’ investors play an important role in financing small and medium enterprises and in developing entrepreneurship. The importance of investor angels for the development of small and medium-sized enterprises can be seen in the following sections:
First of all, the size of investments invested or planned by angel investors are very important. According to Jeffrey Sohl, manager of Centre for Venture Research, there are 300,000 to 350,000 active angel investors in the United States who invests $ 30 billion a year in around 50,000 projects. There are between 20,000 and 40,000 angels in Britain who invest between 0.5 and 1 billion pounds a year in 3,000 to 6,000 companies. He estimated that the ratio of potential angel investors to assets was 5: 1.
Secondly, many entrepreneurs are interested in the so-called “smart money”, which means that angel investors not only invest money but also knowledge and expertise. For this reason, angel investors are becoming more and more “interesting” for entrepreneurs compared to other sources of capital.
Table 1: The role of angel investors in the development of famous companies
Value at exit
$ 154 million
$ 26 million
Cylinder for replacement propanium
$ 24 million
Internet E-mail Reminder service
$ 3 million
Body care products
£ 42 million
Kidney medical treatments
£ 71 million
£ 2.5 million
Third, angel investors have extensive experience in the industry. During work, investors develop many relationships, including successful entrepreneurs, bankers, insurance companies, accountants and so on. As soon as they invest in small and medium enterprises, they use these contacts to help these companies develop and achieve positive financial results.
Fourthly, the importance of angels for small and medium-sized enterprises depends on succession. Often, it happens that after retirement or death of the business owner some of his successors do not want (or cannot) do the same. According to research conducted in Australia, 63% of companies are in the hands of the next generation, and only 7% of companies follow the third or fourth quarter of the fourth generation. In such cases, the company will survive if it has the potential to be successful, recognized by angel investors.
Due to its peculiarity, venture capital can successfully finance companies in all phases of the business, even in very specific and difficult areas. Start up is the first step in the development of the company. The credit risk of any project is extremely high and the costs high. Thus, here’s how VC help the business and its significance:
1. Promoting entrepreneurs: Just as a scientist realizes the results of his laboratory and ensures his commercial success, the entrepreneur transforms his technical know-how into an economically viable project with the help of venture capital funds.
2. Product promotion: New products with modern technologies become commercially viable, mainly through the financial support of venture capital institutions.
3. Encourage customers: Financial institutions provide venture capital to their clients, not only as financial support, but as a global contract that includes support in the areas of administration, marketing, technology and others.
4. Unlocking latent talent: By financing entrepreneurs, venture capital institutions pay more attention to the borrower’s potential talent, which contributes to an increased exposure to credit risk.
5. Promotes exports: The venture capital institution encourages export-oriented entities which leads to more foreign income generation.
6. As a catalyst: A venture capital institution acts more as a catalyst to improve financial talent and manage the credit institution. Credit concerns are more likely to self-employment and take the necessary steps to repay the loan.
7. Create more job opportunities: Venture capital institutions encourage entrepreneurship and self-employment. This motivates the other educated unemployed to start new businesses.
8. Insurance against financial risks: not only do venture capital institutions improve borrowing through their funds, but they also create a situation in which they can mobilize their own capital through the capital market.
9. Contribution to economic growth: Promoting new entrepreneurs and reviving sick units boosts the economic growth. The standard of living of the population also increases.
Challenges faced by Angel Investors and Venture Capitalists:
As investing isn’t the full-time job, investors find it difficult to spend required amount of time in the company. Also, many a times investors have to resist the urge to invest more than required in the start-up. Other than this, exiting is one of the biggest challenges an investor faces. Whereas, for any venture capitalist, one of the biggest challenges is to compete with other investors in terms of prices. If the deals aren’t dealt properly then it can cause inflation which will in turn be a loss for venture capitalist. Secondly, building a portfolio of profit is a challenge as they have to see 100 to 400 companies each investment. VC have to put efforts in selecting a company and sees to it that no stone is left upturn. Lastly, the market for cryptocurrencies is growing fast, but not without risk. In fact, a very large number of investors suffered hacker attacks and were also physically threatened. The threats are very real and harmful because bitcoins are lost forever if someone steals them.
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