Introduction
Venture capital has been a very successful tool over the past years. But, due to COVID-19, there has been the possibility of a decline in this growth. However, the most recent forecasts of the International Monetary Fund (IMF) expect a strong rebound in 2021 that will lead to a greater return towards the long-term years 2022-2025.
Venture capitalists invest in only ideas which have the potential to be successful expand into a wider market and offer high returns on investment.
In the present, Venture capitalists are more apt to invest in foodrelated tech startups as people are more discerning about their diet and health. They’re managing their busy working schedule while maintaining a healthy food regimen. This ease shouldn’t come at the cost of quality. People nowadays want to know what’s in their fooditems, where does it come from and how its manufacturing and its sourcing affects the environment. It’s apparent by 2020, when concerns about the food-tech industry is set to grow.
What is more crucial to own venture capital rather than Angel Investor?
Venture capitalists are often confused with angel investors, but in the larger context, they are two different concepts.
Angel investor uses their own money to invest in small companies while a venture capitalist is a person or firm who invests in small enterprises typically with money that is pooled from investment firms or large corporations as well as pension funds. Naturally, VCs do not employ their own money to invest in businesses.
Angels investors offer mainly financial assistance, whereas an investor in venture capital seeks an innovative product or service, and endowed management team, and an extensive market.
What are the reasons startups look for VC funding?
In the real world banks do not provide the same kind of loans to entrepreneurs as any other businessman who is successful.
Banks have the rule to offer loans by examining the audited income statements, and balance sheets, to determine if a business qualifies for loans. However, these documents aren’t as important in determining the early stage startup’s value. In the beginning startups must submit an audited balance sheets and income statement. While a registered or unregistered business has a variety of assets that serve to secure the loan offered by banks These include machines, land, laptops furniture, etc.
Venture capitalists see beyond the assets and liabilities including market-size approximations and also the startup’s team of founders.
These tools aren’t 100% accurate, which means that most investments lose value. But, dividends on equity share do not have the sealing limit and, as a result, the high risks of investing into startups are generally justified. The equity financing is arranged in such a way that it will beneficial to shareholders in all other way.
Thus, the equity financing of VCF has helped the startup setting well. Startups can grow faster without slowing right down in order to pay off debt similar to traditional business loans and VCs can benefit from growing startups’ rapid development after their departure.
What is Venture Capital?
Venture capital is a finance process for new ventures and an investment instrument for institutional investors as well as wealthy individuals. In simple language an enterprise that is able to growrequires some cash to expand. Investors or institutions prefer to invest capital into such businesses with an outlook of long-term growth. The person who invests in a business is called a venture capitalist . the amount invested is referred to as venture capital fund.VC is subject to the SEBI Act, 1992 and SEBI (Venture Capital Fund) Regulations, 1996.
What is the meaning of an enterprise in food technology?
The field of food technology comprises a specific area of food science which deals with the production preservation, quality assurance as well as the research and development for food items. It is managed by the Food Safety and Standard Authority of India (FSSAI).
Process of Venture Capital
“Better Capital is leading pre-seed financing in food-tech firm Voosh”: Voosh Technologies Pvt Ltd, a food-tech company has raised an undetermined sum as part of a pre-seed round of financing. It is therefore possible to raise money prior to seed capital is raised.
Seed capital is an initial stage. In this stage the company may not have the final product yet but they do have an idea that how they differ from other market players to convince potential investors of the benefits of food venture capital.
At this stage, has a sample product available with a business strategy and require additional funding for design and development. This is called the startup stage. The Venture utilize this money for market research, determining the size of the market for the product and report it to the venture capitalist.
The first stage can also be known as the “first stage,” this stage is following the seed and startup stages. In this stage, the product or service has been developed and is being used on the market.
The Expansion Stage is also known as the third or the second stage The expansion stage happens where the business is able to see rapid growth and requires more capital to keep pace with demands. The next stage is the series investment from the venture capitalist.
As a company reaches its maturity , they seek the bridge financing. This funding is used to finance activities like mergers, acquisitions, or IPOs. In this phase, most investors opt to sell their shares and end their relationship with the company, receiving a significant profit on their investment.
Documents between startup and VC
Purchase of stock
This agreement is designed to ensure that the terms of purchase and conditions on the stock.
The price for purchase of the stock.
The warranty and representations are made by both parties.
Conditions to closing.
Investors’ rights agreement
Provisions under this agreement give investors rights, like information rights. The Agreement specifies how and what information about the business is shared with the shareholders.
The terms of this agreement can be used for subsequent funding rounds also This agreement is focused with minority shareholders as well as their holding rights as minority investors as well as the rights they own.
The agreement usually contains specifics about the shares that are that are subscribed to, for instance the following:
Terms of payment.
Total number of shares as well as their classes.
Representations and warranties about the state of a business’s.
Terms Sheet
The term sheet is a non-binding arrangement between VCs and startups about the conditions to invest in the business.
The term sheet is a first document to confirm that the VC firm is planning to invest and will begin to finish due diligence, and then prepare final legal documents for investment.
Non-disclosure Agreement
Parties can sign an NDA because it is crucial for a start-up company to protect their idea before it is traded in the market.
Valuation of the startup company
The assessment of the business is a crucial situation to both the parties. The valuation is described as the pre-money valuation , referring to the agreed-upon value of the company prior to the capital is placed in.
Valuation is negotiable and it doesn’t come with a specific formula or method to rely upon., The less reduction in value the business owner will experience when it has a greater estimation and Visa Versa.
The key factors for determining the valuation of an asset are:
The story of the founders.
Size of market.
The proprietary technology created through the organization.
The process of transforming a product into something worthwhile.
The opportunity for recurring revenue of your business strategy.
The Capital effectiveness of the business model.
The valuation of similar companies.
The demand for the company is very high, and the possibility of getting investment from investors other than yours is probable.
Tax implications of Venture capital funding
As per SEBI Guidelines, to avoided double taxation on the same stream of income from an unincorporated pool, and at the same time maintain a single tax at the investor level. A Venture Capital Fund is a fund that is owned by investors and is in the control of the investor. It is a pass-through entity and exempt under the income tax.
For instance, if Venture capitalist invests in a food tech firm (Zomato Private Limited) the tax will be paid by the venture capitalist. So, this means that Zomato will be free from tax implications. Tax consequences.
Under the present system under the present regime, income from a VCF is tax-deductible at fund level. It is also tax-deductible when it comes to the investor.
A feature of the Venture capital fund (VCF) in food Tech
Most of the time, the equity shares that the funds provided by VCs are purchased by VCFs.
VCFs also have highly qualified professionals and experts to the investment firm for efficiency.
The main benefit VCFs can provide is networking opportunities. Should the investor be wealthy and well-known the company that is starting will achieve the speedy growth.
VCFs enhance the enterprise decision-making capabilities that invest in them.
VC reduces the risk involved in the project.
Advantages and disadvantages of Venture Capital
It is said that ” all coins have its two sides” The same is true for venture capital. there are some disadvantages in venture capital.
When an investor invests capital which has a huge amount gives them the control over enterprises, and for which the original founder loses the maximum decision-making authority right.
The procedure of acquiring venture capital is lengthy and difficult.
This type of investment is not certain to the Venture capitalist, and will be realized only in a longer time.
Conclusion
New consumer demographics comprising highly skilled and youthful professionals have brought a growing trend to the startup sector. Diverse sectors in the food tech industry have led to the dynamic growth of the startups. Investors should study these segments to ensure they have the best investing chance and to get a good ROI.
The food technology industry is growing due to the an online delivery service with a accumulated that is easy to use for a and a larger audience of consumers. Successful examples are Swiggy, Zomato, Fassos etc. Market volatility can be a catalyst for an aggressive venture capitalist fight for long-term and sustainable benefits.
So, venture capital is the method that helps support this growing sector of economy, and also encourages Food- Tech Startups to meet the demands of the consumers , with the help of help qualified individuals.
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