Ep #9 | WTF is Venture Capital? Ft. Nikhil, Nithin, Rajan A., Prashanth P. & Karthik R.
Sep 2, 2023
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Marquee investors in the venture world discuss venture capital, the past decade, traumatic experiences, affluent founders, fund size, entrepreneurship, investors' perspective, distribution of profits, consumer market, building better products, trends, plant-based food, sustainable materials, AI and skilling, founders with a purpose, hard work and luck, confidence and energy, continuous support, rising asset prices, charitable organizations.
Venture capital funds typically have a long fund life cycle of 10 to 12 years with a two-year extension option and charge management fees and receive carry.
Angel investors provide their own capital to early-stage companies and offer valuable advice and expertise, but face higher risk compared to venture capitalists.
Private equity focuses on mature companies with established track records, while venture capital invests in startups and high-growth potential businesses.
Both venture capital and private equity firms source their capital from institutional investors, including pension funds and endowments.
Successful entrepreneurs exhibit resilience, stick to their mission, and have a deep personal connection to the problem they are solving.
Founders who can effectively communicate their vision and captivate others tend to be more successful in attracting investors and building a strong team.
Deep dives
Venture Capital: Institutional capital invested in early-stage companies
Venture capital firms are organized institutional investors that provide capital to early-stage companies. They typically invest in startups and high-growth potential businesses. The funds are raised from institutions, such as endowments, pension funds, and other large investors.
Angel Investing: Individuals investing their own capital in startups
Angel investors are individuals who provide their own capital to early-stage companies. They often have sector-specific experience and can offer valuable advice and expertise to the startups they invest in. Angel investing carries higher risk, and the likelihood of making significant returns is lower compared to venture capital investments.
Fund Structure: Fees, carry, and fund life cycles
Venture capital funds typically have a 10 to 12-year fund life cycle with a two-year extension option. The fund managers charge management fees, usually around 2% of the fund size annually, to cover operating costs. They also receive carry, a share of the profits, typically 20%, once the fund has returned the capital and met certain thresholds. The distribution of profits occurs when the fund exits its investments.
Private Equity: Investing in established, mature companies
Private equity typically focuses on more mature companies with established track records and stable cash flows. Private equity funds invest in companies that are ready for growth and expansion. The fund managers may take a more active role in the management of the portfolio companies and often have a shorter investment horizon compared to venture capital firms.
Sources of Capital: Institutions and family offices
Both venture capital and private equity firms source their capital from mostly institutional investors, such as pension funds, endowments, and sovereign wealth funds. Some domestic private equity firms might also have family offices as investors. Foreign capital is often attracted to the Indian market, making up a significant portion of the funds raised by both venture capital and private equity firms.
Resilience and mission-driven approach
Founders who exhibit resilience and a deep personal connection to the problem they are solving tend to be successful. This includes the ability to stick with the mission despite near-death moments and setbacks.
Technical expertise and complementary team
Startups that have a strong technical co-founder or CTO, in addition to a CEO, tend to fare well. The technical expertise is crucial for building and scaling the product, while a complementary team with diverse skills ensures a well-rounded approach.
Adaptability and willingness to change
Successful entrepreneurs demonstrate agility and a willingness to change their strategies and beliefs when necessary. This flexibility allows them to evolve and adapt to the evolving market and customer needs, staying ahead of the curve.
Storytelling and effective communication
The ability to tell compelling stories and effectively communicate the vision and mission of the startup is crucial. Founders who can captivate others and convey their ideas in a clear and engaging manner tend to be more successful in attracting investors, customers, and building a strong team.
The importance of founder-market fit
Founder-market fit is crucial for the long-term success of a startup. It involves being self-aware of one's strengths, weaknesses, and characteristics, such as greed, jealousy, and insecurity. Pretending to be someone without these traits is futile. Founders need to be passionate about the space they are working in, but also be willing to change and acquire new skills. This is particularly relevant in industries like B2B manufacturing, where founders may struggle due to the heavy lifting problems involved.
Issues with co-founder compatibility and IPOs
Co-founder compatibility is important for the success of a company, both during tough and good times. Co-founders who do not share the same passion or vision for the evolving business can lead to its downfall. Additionally, IPOs in India have been marred by the overpricing of stocks and the prevalence of secondary offerings, which can unfairly impact retail investors. The need for appropriate pricing and limited secondary offerings in IPOs is crucial for sustaining a healthy ecosystem.
In this episode, we bring marquee investors, the OGs of the venture world. Learn what venture capital is, what works and what doesn't, and their learnings from many decades of funding the startup ecosystem in India.
I am sure it will be as insightful as an entire college semester for many. So do feel free to grab your notepad to soak up all the knowledge.
This is, by far, the most in-depth episode we have done and this will give you insights not only into funding but also into the ongoing macro view of the world of business, investments, and finance in general.
#NikhilKamath: Co-founder of Zerodha, True Beacon and Gruhas
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#NithinKamath: Founder & CEO of Zerodha
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#KarthikReddy: Co-Founder and Partner of Blume Ventures
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#RajanAnandan: Managing Director of PeakXV Partners
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#PrashanthPrakash: Founding Partner of Accel Partners
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