What is venture capital?
Venture capital (VC) is a special type of investment where the investors take a risk by providing capital to different businesses and startups to get them started. It is a way for rich investors, investment banks, and other financial institutions to give money to new companies and small businesses with the potential to grow a lot in the future.
Venture capital is not a new concept, especially in Asia, where startups are booming. In fact, Southeast Asian startups raised $8.6 billion in 2020. This should not come as a surprise as companies like Lazada, Tokopedia, Grab, and Gojek were founded in ASEAN, and achieved unicorn or decacorn status.
While it is true that a good idea and plan are essential for business success, having the right resources and capital is also vital. This is where venture capital financing, or VC funding, comes into play. Startups are young companies that develop a unique product or service that hopefully scales and disrupts traditional business models. Often these companies have limited funds or capital to expand and grow their business. Unlike a bank loan that requires assets and financial history, a venture capitalist looks at the long-term return on investment based on a business plan and future projections.
The support a startup gets from a VC firm may not only come in monetary form but also technical or managerial. As the company is just starting, they will not expect immediate profits but will take an equity stake in the company. They may become a board member as well.
Embracing the venture capital financing approach comes with the following four benefits:
- Allows startups to grow and expand faster. The investors believe in the company’s vision and mission. They are willing to take a risk, as opposed to traditional banks that need proof of corporate stability.
- Provides guidance and expertise. It is common for a representative from the venture capital firm to be appointed to a company’s board, enabling them to provide guidance on bid decisions. VC firm representatives become a valuable asset because of their unique experience.
- It offers startups a great networking opportunity as venture capitalists have a broader network of connections across different industries. This can prove to be beneficial for startups since they want to grow and expand quickly.
- Unlike bank loans, which have to be repaid, venture capitalists put their own money on the line, even if the business fails. They are willing to take a chance on a growing startup, where they reap the rewards or suffer the losses.
However, remember that venture capitalists are very selective in choosing startups to invest in. That is why crafting a proper business plan and pitch is vital. Emphasise the uniqueness or differentiation that your business has to offer and what the expected returns are going to be. Venture capitalists want to invest in companies that can redefine or dominate an industry, generating outsized returns for their investors.
Disruption is a feature
Look at Gojek and Grab, for example. They have changed how we travel and order food. We no longer need to go to a restaurant or call their delivery service phone number; we can click and order it from our phone. The same goes for transportation; we used to hail a cab or a motorcycle on the street, now we can now book via our phone. Gone too are the days of retail relying on brick and mortar stores. Today, most purchases are a click away.
Changes such as these disrupt traditional operators, and they are characteristics venture capitalists look for. This trend will continue as technology becomes more sophisticated. VC funding provides an alternative for startups to receive financing and establish themselves as a viable company. But, the company has to have the potential to attract the right venture capitalists in the first place.
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