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Venture Capital funds

Over the past decade, venture capital (VC) funds have become an increasingly popular investment option in India. The main function of VC funds is to manage the money of investors who are majorly interested in gaining private equity stake in startups or SMEs with great growth potential. For startups, SMEs, and small entrepreneurs, VC funds become a beneficial source for equity financing. Thus, these funds provide these recipients with financial help at vital moments. VC funds can be classified as high-risk, high-return investments.

The modus operandi of VC funds is very simple. They tend to hedge small bets on many startups that are young and possess robust growth potential. VC funds spread their corpus across different startups after performing a preliminary study on prospects. Thus, at least a few of them will achieve the expected growth potential, which will result in a large payout at the term-end, benefitting the fund and its investors. For instance, let’s see what happens when a VC fund invests in startup 1, startup 2, startup 3, startup 4, and startup 5.

Let’s assume the following investment schedule with expected returns:

Investment Exit Time Horizon Invested Corpus (Rs in Cr) ROI expected per annum
Startup 1 5 years Rs.2 7%
Startup 2 6 years Rs.4 10%
Startup 3 8 years Rs.3 9%
Startup 4 7 years Rs.5 11%
Startup 5 6 years Rs.6 8%
Total Rs.20

Now, let’s look at the returns schedule of the above example:

Annual Returns 1st year after funding Final Returns
Expected Actual Difference
Startup 1 1,400,000 1,000,000 (400,000) -29%
Startup 2 4,000,000 2,500,000 (1,500,000) -38%
Startup 3 2,700,000 2,500,000 (200,000) -7%
Startup 4 5,500,000 6,000,000 500,000 9%
Startup 5 4,800,000 7,000,000 2,200,000 46%
18,400,000 19,000,000 600,000


Table 1 shows that the VC invested Rs.20 Cr in five startups along with mentioning the expected returns from the respective investments. Table 2 shows the annual returns after the first year of funding. At the end of year 1, startup 1, 2, and 3 were non-performers with negative returns in the range of 7-40% amounting to total losses of Rs.21 lakhs. That said, the two investments in startup 4 and 5 were big winners yielding returns of Rs.27 lakhs. These two investments clearly helped the VC mitigate the losses incurred in startup 1, 2, and 3 by yielding annual positive returns of Rs.6 lakhs, while balancing the investment risks.

Since VCs spread their money in numerous investment avenues, they enjoy a vital cushion against various risks linked with their non-performing investments. This in turn helps them effectively reduce the investment risks of the people who have parked their money in the VC funds.

To know more about investing in real estate funds or other Alternative Investment Funds (AIFs), call us on 022-28583333 or write to us at www.altsmart.in

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