Business

Where do Venture Capital firms get their money from? Find out here

Ever wondered where the investors get their money from? Yes, we cannot think of a source. However, after researching a bit over the thing ReviewTech found out some facts which made sense. It is not rocket science per se but it is not easy to start a Venture Capital or even be an investor, the reason being you need money to do both. Now money is always the problem but not for Venture Capital firms. They always have money to invest into and it doesn’t seem to be a problem. However, the VC firms’ money, which they invest in startups is not necessarily theirs.

Let us understand it this way, anyone can start a Venture Capital firm, yes this contradicts my previous statement but hang on. A Venture Capital is something which has a lot of money which comes from many Limited Partners. Now, the representatives of Venture Capitals should know a lot of people who are rich and are sitting with huge money in their bank accounts. Now, VCs will approach these people with lots of money, they will convince them that their money when invested will reap profits. If you go to people and tell them that their money will grow multiple times by just waiting then probably everyone will invest.

However, that is not the case. People with a lot of money take a lot of convincing. They have earned the money with a lot of hard work and won’t throw it at a couple of blokes blabbering numbers in front of them. So the representatives of VCs have to present facts and figures in a very convincing way and when they do they have to make sure they invest in the right startup so that their money is multiplied.

Now, these people can be institutions as well. There are insurance companies which lend money to VCs as they have a lot of assets which were claimed or unused insurance money. There are large institutions or foundations like Universities and Hospitals which have money in their bank account and invest for a long term benefit. Apart from this, charitable foundations such as Carnegie Corporation or Kresge Foundation and many other such non-profit organizations also have a lot of money and they give VCs a pile from their pile of money which can be multiplied in future.

The question which now arises is how the money is multiplied? So there is a simple process. A VC invests in a startup which is very young and so the stakes in the startups are also very cheap. So a VC invests in the startup in exchange of the stake of the company. Now the percentage of the stake remains the same for whatever years the company exists. However, the worth of the company grows and the price of the stake owned by the VC also goes up. And that is how the money is multiplied.

Everything sounds very simple while reading but there are a lot of complications as VCs are dealing with direct money. A VC needs to have an eye for some great startups so that they can invest in the same. Everything depends on the eye of the VC for startups and their convincing power required to bring in funds for funding.

-Unmesh Phule

Comment here