From where does Venture Capitalists bring so much money?
Venture Capital is something you hear about all the time in the startup and tech world. But do you know what it is and how it works?
As it’s fog and cold all-around in Delhi, in this edition of xplainerr, we will be clearing the clutter on VC’s.
When a new private company wants to raise a lot of money to expand and grow; it would go to a person or a firm who can finance it. Ummm! The financer is the venture capitalist and the fund is sublimely called a venture capital fund.
Hey, Wait! This is getting complex. Why don’t these companies go to banks then and take a loan?
Startups are unpredictable. Hard. Very hard indeed! Growth is a long term affair. So, when VC’s find a technological firm which has the potential to grow big, very big indeed, like the Swiggy or the Ola, in course of 8–12 years; they invest money in them. Not as a loan but as partners in crime i.e. equity shares — like 20% of the company’s stake for $30 million USD. (around 2100 crore) Wooo! That’s so much money with so much risk. Look what happened to Uber!
Let’s keep Uber’s story for some other day. But how do VC’s bring so much money? Do they have a bank or they rob people?
Few people have so much money than they know what to do with but want a return on that money. Then there are institutional investors like banks, credit unions, insurance companies, pensions, hedge funds (Google it!). All of these pool money in venture capital fund and are called LP. Limited Partners! Although, individual venture capitalists are rare. Most of the VC fund comes from institutional investors.
Are you interested in numbers? So are we? A typical VC firm manages about $207 million (around 14,854 crores) in venture capital per year for its investors. On average, a single fund contains $135 million (around 10,000 crores). Mind you, these are the US average.
That’s all we have in our first newsletter! Happy new year folks :) If you think xplainerr is useful, share this link with your friends and let them also join the party
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