Introduction
Venture capital has proven to be a profitable tool in the recent years. But, due to COVID-19, there has been a downfall during this growth. However, the most recent forecasts by the International Monetary Fund (IMF) anticipate a significant rebound in 2021 that will lead to a greater return towards the long-term years 2022 to 2025.
VCs invest solely in ideas which have the potential to be successful in wider market with a an excellent return on investment.
In this day and age, Venture capitalist has more advantages to invest in food-related tech startups as people are cautious about their diet and health. They’re managing their busy work schedule with a punctual eating plan. This ease shouldn’t come without the quality. Nowadays , consumers want to know what’s in their food, where it comes from and how its manufacturing and the way it is sourced affects the environmental impact. This is evident in the year 2020 that the food technology industry is growing.
It is why it is so important venture capital rather than Angel Investor?
Venture capitalists are often misunderstood with angel investors, however in the context of a larger picture, they’re two different terms.
Angel investor utilizes their own funds to invest in small-scale businesses and venture capitalist is an individual or company who invests in small-sized companies typically with money collected from investment companies, large corporations, and pension funds. Naturally, VCs do not invest their personal money to invest in businesses.
Angel investors are primarily financial aid, while the venture capitalist looks for a strong competitive product or service. They also have an a well-funded management team, as well as the opportunity to tap into a broad market.
What are the reasons startups look for VC capital?
In a practical world, bankers do not offer the same kind of loans to entrepreneurs as every other successful businessperson.
Banks are required to give loans based on financial statements and balance sheets to determine if a company is eligible for loans. These documents aren’t useful when determining an early-stage startup’s value. In the initial stages startup, startups should provide an audited balance sheet as well as income statement. In contrast, a registered or non-registered company has different assets as collaterals to the loans that banks offer The most common assets are machinery, land, laptops, furniture etc.
Venture capitalists see beyond the liability and assets like market-size estimates, and the startup’s establishment team.
The tools above are not ideal, which is why most investments will drop their value. Yet, dividends on equity share do not meet the limit of sealing, thus because of which the chance of investing in startup companies is typically acceptable. Equity financing is set up so that it benefits an investor, in any other way.
So, the equity funding of VCF has helped the startup setting well. Startups can grow faster without slowing down to repay debt unlike traditional business loans, and VCs are able to profit from an explosion in the growth rate of companies following their exits.
What is Venture Capital?
Venture capital is a financing method for startups and an investment vehicle for institutional investors and wealthy individuals. In simple language, a startup venture with the potential to expand, requires a certain amount of cash to grow. Investors or institutions prefer to invest capital into companies with an eye towards growth over the long term. The person investing is called a venture capitalist . the money invested is known as a venture capital fund.VC is under the control of the SEBI Act, 1992 and SEBI (Venture Capital Fund) Regulations 1996.
What is meant by a food-tech venture?
Food Technology is subset of the food science that deals with production, preservation, quality control as well as the research and development for food items. It is managed by the Food Safety and Standard Authority of India (FSSAI).
The process of Venture Capital
“Better Capital is leading pre-seed financing in the food-tech company Voosh”: Voosh Technologies Pvt Ltd is a food technology firm, has raised an undisclosed amount as part of its pre-seed round of funding. So, it is possible to raise money prior to seed capital is raised.
Seed capital is an initial stage. At this stage the company may not have the final product yet, but they know what they are doing and what makes them different from the other market players in convincing potential investors to invest in food venture capital.
At this stage, the company has a sample product available with a plan for business and require funding to continue product development. This is called as startup stage. The Venture use this funding for market research, determining the size of the market for the product. They then present this to venture capitalists.
The initial stage is called the “first stage,” this stage follows the seed and startup stages. Mainly here, the product or service is designed and is currently being used on the market.
The Expansion Stage is also known as the third or second stage The expansion stage happens when the business is experiencing rapid growth and requires additional funding to keep up with the demand. This is where it will be able to make the series investment that is made by investors like venture capitalists.
As a company reaches the maturity stage, they obtain bridge funding. The money that is gathered can be used to fund activities like mergers, acquisitions, or IPOs. At this point, many investors will decide to sell their shares and terminate their association with the company which means they will receive a large return on their investments.
Documents between startup and VC
Purchase of stock
This agreement assists in maintaining buy-in terms and conditions on the stock.
The price for purchase of the stock.
Representations and warranties made by both both.
Conditions to closing.
A contract for the rights of investors
This agreement grants the investors’ rights, for example, information rights. The Agreement outline how and which information about the business is shared with the shareholders.
The provisions mentioned under this agreement can be used to fund future rounds of funding as well the agreement is concerned about the minority shareholders and their holding rights minority investors and the rights they enjoy.
The agreement usually contains specifics about the shares that are that are subscribed to, for instance the following:
Payment terms and conditions.
Total number of shares as well as their different class.
Representations and warranties about a company’s condition.
A Term Sheet
The term sheet is a non-binding agreement between VCs and startup companies on the terms of investment in the company.
It is the initial document to confirm that the VC firm is planning to invest and wants to begin to finish due diligence, and then prepare final legal documents for investment.
Non-disclosure Agreement
Parties are able to sign the NDA because it is crucial for startups to safeguard their concept before it becomes tradable on the market.
Evaluation of the startup business
The amount of value that is placed on the business is an important event and is a significant one for all parties. The valuation is remarked as the pre-money valuation , referring to the value agreed upon by the company before the capital is placed in.
Value is a matter of negotiation and doesn’t come with a specific method or formula to base it upon. The lower the amount of reduction in value the business owner will experience when it has a greater value and Visa-Versa.
The key factors for determining valuationare
The experience of the founders.
Market size.
The proprietary technology already designed by the company.
Progress towards a worthwhile product.
Recurring revenue opportunities are part of this business plan.
The Capital effectiveness is a key element of the model for business.
Valuation of other similar companies.
If the demand for the business is large and there is a high chance of receiving investment from other investors is probable.
Tax Implication on Venture capital Funding
As per SEBI Guidelines, to avoided double taxation on the same income stream of a pool that is not incorporated and at the same time maintain a single taxation at the investor level. A Venture Capital Fund is a group of investors’ funds and held by the investor. It must be considered a pass through entity exempted from income tax.
For example; If a Venture capital is investing in a food tech company (Zomato Private Limited) the tax will be paid by the Venture capitalist. So, this means that Zomato is exempt from tax implications. Tax impact.
Under the present regime in the present system, the earnings of a VCF is tax-deductible at the fund level. It is also tax-deductible when it comes to the investor.
Feature of Venture capital fund (VCF) in the food tech industry
The majority of the equity stocks for which the funds are provided by the VCs are bought by the VCFs.
VCFs also include professionals with experience and qualifications to the investment firm for efficacy.
One of the biggest benefits that VCFs have is the networking opportunities they provide. In the event that the financier is wealthy and well-known the new company will be able to grow rapidly.
VCFs enhance the enterprise decision-making capability that invest in them.
VC reduces the risk involved in the project.
Benefits of Venture Capital
According to the phrase ” all coins have two sides” The same is true for venture capital. there are disadvantages in venture capital:
The moment an investor invests capital that is of a significant amount gives them the control over businesses and due to which the original founder losses the authority to make the final decision.
The process of acquiring venture capital can be long and complicated.
This kind of investment is not be a guarantee on the part of Venture capitalist and is realized only in a long-term.
Conclusion
New demographics for consumers that include highly skilled and youthful professionals are providing a rising trend to the sector of startups. Diverse sectors in the food-tech industry are responsible for the dynamic growth of the startup companies. Investors should study these segments to ensure they have the best investing opportunity and high return on investment.
The food technology industry is growing due to an online delivery system that’s accumulated that is easy to use for a and a larger audience of consumers. Successful examples are Swiggy, Zomato, Fassos etc. Market fluctuations can lead to a venture capitalist aggressive fight for long-term and sustainable benefits.
So, venture capital is the way that supports this new sector of the economy, and also encourages Food- Tech Startups to meet the demands of the consumers , with the help of experts who can help.
