Venture Capital Financing: Decoding Process and Practice

Venture Capital (VC) financing has emerged as the most sought-after mode of investment put in a company at the early and growth stages of development. It is a type of investment made by a private institution in a new and growing enterprise. Depending on the stage of the business, venture capital funds are utilized by startups for expansion, scaling up, product development, and other purposes. These investments are typically high-risk, high-reward propositions.

Venture capitalists are the people who invest this money and become financial partners. Private equity financing is offered to early-stage, high-potential growth enterprises (startups) as seed funding or more commonly, as a growth funding round after the seed funding round (also referred to as Series A round).

Venture Capital Firms

Venture capital firms are investment organizations that fund and advise early-stage to late-stage enterprises and startups. They invest in promising private enterprises after raising capital from limited partners. VC firms often invest in a company for a set period of time. The function of venture capital firms Canada is most prominent in the second stage when the company founders' unique idea requires assistance in growing, scaling up, and becoming economically viable. Finally, the startups are sold to a large firm or listed as a stock IPO on a public exchange. As a result, a venture capitalist invests in and nurtures an entrepreneur's idea for some time. The investor then leaves with the assistance of an investment banker, reaping a healthy profit.

Stages of Venture Capital Funding

The Pre-Seed stage is the finalization of a product or service prototype; VCs are usually not interested at this point. Founders must raise capital from their own resources or from angel investors, angel networks, and other means.

For founders of enterprises or startups, Seed Stage is also very critical. The founders need to present a pitch deck and convince the VCs that the idea or innovation has the potential to grow into a promising and profitable business.

Series A Funding is the initial round of venture capital financing. It is at this time that venture capitalists become interested. The entrepreneurs need to demonstrate their company's potential in terms of product mix and growth strategy.

After the pre-seed, seed, and Series A stages, the startups are ready to scale at the Series B stage. Venture capital financing supports the production of goods, marketing, and sales efforts. It is a stage when venture capital firms go beyond potential and look for performance.

When a company or startup is on a growth path, it receives Series C capital. Additional venture capital funding is necessary to develop new goods and reach new markets as the company strategy has been tried and proven.

Following this stage, venture capital investors hunt for an EXIT, either through sales or a public equity market listing.

The Processes

The first phase in venture capital financing is deal origination, followed by screening. Entrepreneurs are either asked to offer a brief profile of their enterprise or invited for a face-to-face session to clarify important points throughout the screening process. The most important step in the venture capital financing process is evaluation. The evaluation process is a detailed procedure that assesses the project's capabilities and the entrepreneurs' ability to meet such demands. During the evaluation process, several traits in the entrepreneur are considered, such as entrepreneurial talents, technical competence, manufacturing and marketing ability, and experience. Early-stage investment begins with this procedure. Several seed capital funding and family offices launched or raised funds for early-stage rounds, making the pre-seed through Series A landscape more significant. Other fundamental aspects of venture capital funding around the world include deal negotiation, post-investment activities, and exit planning, which are followed by venture capital firms in Canada and India as well.

VC Financing in Canada

In recent years, Canada's VC ecosystem has experienced considerable growth, with 2021 setting a new record in total investment, with $14.7 billion of VC investment in Canadian startups. With record investment, it is promising to note that Canada has now ranked among the top VC investment. As per the Organisation for Economic Co-operation and Development (OECD) assessment, Canada is ranked third for VC investment. VC financing in Canada has been increasing significantly. Venture Capital Firms of Canada, especially Toronto (Ontario) based funds, have been leveraging the benefits of the emerging startup ecosystem. They stuck mega deals in 2021, and the process continues in 2022. VC investment in Canada remained very strong in Q1'22 too. Biotechnology, Edu-tech, Fintech, E-Commerce, and Life Sciences attracted the most VC financing.

There are over 700 Venture Capital Funds in Canada. JC Team Capital, Diagram Ventures Garage Capital, Internet of Things, OMERS Ventures, AmorChem, Azure Capital Partners, Canopy Rivers, Axion Ventures, Brisio, and Golden Ventures are among the top venture capital firms in Canada. With financing from them, Canadian startups are significantly progressing and scaling. With a robust ecosystem, Canadian startups are also attracting an increasing number of international venture capitalists.

Venture Capital Financing in India

Over the years, venture capital financing has been gaining momentum in India. According to Bain & Company's India Venture Capital Report 2022, the Indian startup ecosystem reached an inflection point in maturity in 2021, fuelled by VC investments. India's share of global VC funding almost doubled from less than 3% to 5.6% in 2021. Exits also reflect investor confidence, and 2021 witnessed a record of exits with an increasing number of public listings. With 1,583 deals, Indian startups raised over $42 Billion in 2021, making it a landmark for venture capital financing. Overall, in 108 deals, over $100 Million got invested in 2021. The year was also very promising as 42 Indian startups entered the unicorn club, taking the total tally to 86. In the first quarter of 2022, India crossed a century of unicorns. In 2021, seed-stage funding in India had crossed $1 Billion for the first time with total funding of $1.1 Billion with an average deal size of $2.3 Million.

VC Funding in 2022

The geopolitics-Russia-Ukraine conflict- and its cascading effects on economies would be detrimental in the value and volume of venture capital financing. However, experts believe that venture capital financing in 2022 may cross the 2021 range if stability and peace prevail in the second half of the year. In the first quarter of 2022, the VC financing registered promising growth. The sector expects continued funding momentum with a conducive startup ecosystem. The focus will probably shift to larger rounds in quality assets as dealmaking returns to a more measured pace. New sectors such as crypto, blockchain, health tech, agri-tech, biotech, and e-commerce would attract high-value deals.

The top five most active VC Funds in India include Tiger Global, Better Capital, Sequoia Capital, Accel Partners, and FirstCheque. Robust volume and value would provide an edge to Tiger Global and Sequoia Capital in retaining a leading position in VC financing. With selective large deals, Softbank has also entered into the big league. Traditionally, VC-focused investors, Sequoia and Accel, continued participating actively in small and medium ticket size deals.