Venture capital firms have taken the world by storm like no other. They provide seed funding to all the new startups, upcoming ideas, and people who already have a business and want to expand into a new domain.
The growth of startups in India has been multifold. According to data from the Commerce Ministry, the number of recognised startups in the country increased from 471 in 2016 to 72,993 in 2022, representing a massive 15,400% increase.
Startups and early-stage growing enterprises with little to no operating history but high growth potential are funded by venture capital, a type of private equity.
Venture capital firms in India have grown by leaps and bounds in the last decade. The rapid increase in startups led to the growth in venture capital in India. In comparison, the venture capital market runs into billions worldwide.
In today’s time, Venture capital in Mumbai and other metropolitan cities are gaining a solid foothold. The new businesses that do not have access to stock markets and do not have enough cash flow to take debts are aided by venture capital financing. Both parties can gain from this arrangement: enterprises receive the funding they need to launch their operations, and venture capital firms acquire shares in potential organizations.
Furthermore, venture capital firms play a keen role in leading organizations towards IPO. They help the organizations to perform well in the IPO based on the following factors:
- Astute Understanding of the Organization by venture capital companies:
First, venture capital firms have reliable information on the issuing firm because, being members of the board of directors, they benefit from unique working relations with the issuing firm’s team of directors, unlike the other financial intermediaries. Second, venture capital firms have to verify false certifications to ensure that they preserve their reputation.
2. Venture Capital Firms Play the Monitoring Role for Startups:
Venture Capital companies also have a monitoring role in the firms that they finance. Because of their numerous investments, they are encouraged to use diverse methods to supervise or verify opportunist behavior in these firms.
Monitoring is the most common approach to ensure the investment is going as it should. This is the easiest way to check an investment, and it happens more often when the company is in the initial stage. Additionally, pre-investment screening, post-investment monitoring, and value-added activities are offered by venture capital firms in India. If properly executed, these services should enhance the performance of portfolio companies. The more extended investment period before the IPO allows venture capitalists to monitor firms efficiently and add value.
An exemplary venture capital firm such as JC Team Capital, based in Canada, invests in seed funding for startups and series funding rounds in venture capital financing in India and many other countries across the globe. Their field is seed funding and series funding for startups and rapidly growing companies, angel investment, capital investment, and small business funding.
3. Choosing the Right time to go Public
Venture capital experience helps companies choose the most favorable time for an Initial Public Offering (IPO). It leads to reduced instances of underpricing and higher levels of economic performance, providing support for the contribution of venture capitalists’ certification role in IPOs.
Venture capital Mumbai, Delhi, Bangalore, and other parts of the country made a valuable contribution to the success of these startup ventures, along with the gift to economic growth. As a movement of startups has started, various experiences backed by risk capital display their preference for going public. Underpricing of initial public offerings is a worldwide phenomenon in the global capital markets. Additionally, the risk associated with underpricing is undermined by venture capital India to ensure they are right or proper priced.
4. Certification of IPOs by Venture Capital Startups
A venture capital firm can certify the IPO because it uses the reputation it has built up during its financing. Thus, it can maintain a long-term relationship with the fund managers and institutional investors who both finance the funding and are potential buyers during the IPO.
Consequently, an IPO financed by venture capital is more successful than other IPOs because of the venture capital companies’ certification, and the investors in the financial market anticipate an underpriced subscription.
In information asymmetry, two negotiating parties lack equal knowledge of relevant factors and details. The side with more information generally enjoys a competitive advantage over the side with less information.
Venture capital firms are specialized in collecting and evaluating information on innovative firms with strong growth potential, and that they are capable of overcoming the problem of information asymmetry that emerges during an IPO process. Venture capital firms in India, can certify the IPO and can reduce the information asymmetry.
In the end, with the vast venture capital market, which is bound to grow in the future, backing by the venture capital firms in India serves as a shot in the arm for startups. Apart from the venture capital financing, the above points reiterate the importance of venture capital companies in shaping the budding startups towards IPO.