Venture capital has proven to be a profitable tool over the past years. But, due to COVID-19, there has been some negative effects during this period of growth. However, the latest predictions from the International Monetary Fund (IMF) anticipate a significant rebound in 2021, with a gradual return to the longer-term years 2022 to 2025.
VCs only invest in ideas that have the potential to expand into a wider market and offer the potential for a high ROI.
In this era, the Venture capitalist can be more advantageous to invest in food- tech companies as consumers are cautious about their health and their food choices. They are managing the hectic working schedule while maintaining a healthy food diet. And this ease cannot come at the cost of high-quality. Today, people want to know what’s in their foodproducts, the source of it and how its production and sourcing impacts the environmental impact. It’s evident by 2020, when concerns about the food-tech industry are raised.
Why is it more important to have Venture capital rather than Angel Investor?
Venture capitalists can be associated with angel investor, but in the context of a larger picture, they’re two different concepts.
Angel investor invests their own funds to invest in small businesses and venture capitalist is an individual or firm who invests in small-sized companies, generally using money pooled from investment companies or large corporations as well as pension funds. Naturally, VCs do not employ their own money to invest in companies.
Angel investors provide primarily financial assistance, whereas the venture capitalist looks for the most competitive product or service, as well as an endowed management team, and the opportunity to tap into a broad market.
The reason why startups seek VC funding?
In real life banks don’t provide business loans for startups like they do any other businessman who is successful.
Banks are required to give loans based on income statements that have been audited and balance sheets to determine if a business qualifies for loans. These documents aren’t important in determining the early stage startup’s worth. In the early stages, the startups would provide an audited balance sheet and income statement. In contrast, a registered or non-registered company has different assets as collateral for loans given by banks The assets typically include machinery, land, laptops furniture, and land.
Venture capitalists have a view beyond the financial assets and liabilities including market-size approximations and the startup’s founding team.
The above tools are not 100% accurate, which means that most investments will drop their value. However dividends from equity shares do not have the seal limit therefore the high risk of investing in startups is typically defensible. The equity financing is arranged in a way so that it is beneficial to shareholders in all way.
Thus, the equity financing of VCF has helped startups in their setting well. Startups can accelerate growth without slowed down to pay off debt similar to traditional business loans and VCs can benefit from the rapid growth of startups at their exits.
What is Food Venture Capital?
Venture capital is a finance method for startups and an investment vehicle for institutional investors and wealthy individuals. In simple terms an enterprise that has the potential to expand, requires some money for growth. Institutions or investors like to invest capital into the business with an eye toward growth in the future. The person investing in the business is called a venture capitalist . the money involved is called venture capital fund.VC is controlled by the SEBI Act, 1992 and SEBI (Venture Capital Fund) Regulations, 1996.
What is meant by an enterprise in food technology?
The field of food technology comprises a specific area of food science that focuses on the 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).
Process of Venture Capital
“Better Capital leads pre-seed funding in food-tech company Voosh”: Voosh Technologies Pvt Ltd, a food-tech firm, has raised an undisclosed amount as part of a pre-seed round of funding. This means that it is possible to raise funds prior to the seed capital.
Seed capital is a beginning stage. At this stage it is possible that the startup does not have a finished product but they know how they differ from other companies to convince investors of the value of venture capital.
At this point, there is an example product that is available along with a business strategy and need funding for further design and development. This is called as startup stage. The Venture will use the funds to conduct market research and determining the market size of the product and presenting this to venture capitalists.
The initial stage may also be known as the “first stage,” this stage comes after the initial stage and the startup stage. It is the time when the product or service is created and is now being utilized in the market.
The Expansion Stage is also known as the third or the second stage, the expansion stage is where the business is able to see rapid growth and requires additional funds to keep up with demands. In this stage, it is the series investment from an investor called a venture capitalist.
When a company reach its maturity point, they apply for bridge funding. Funding which is obtained here is used to finance activities like mergers, acquisitions, or IPOs. At this stage, often investors choose to take their shares off the market and end their relationship with the company getting a good increase in the value of their investments.
Documents between the startup and VC
Agreement for the purchase of stocks
This agreement helps to maintain terms of purchase and conditions for the stock.
Price of purchase for the stock.
The warranty and representations are made by both parties.
Conditions to closing.
The Investors’ Rights Agreement
Provisions under this agreement give investors rights, like information rights. The Agreement outline how and which information about the company with the shareholders.
The provisions in this agreement can be used to fund subsequent rounds of financing as well, this agreement is concerned about the minority shareholders and their holding rights as minority investors and the rights they enjoy.
This agreement often has specifics about the shares that are purchased, like the following:
Payment terms and conditions.
Shares in total and their various classes.
Warranties and other representations regarding the condition of a company.
The term sheet is a non-binding arrangement between VCs and startup companies on the terms of investment in the company.
The term sheet is the initial document as it confirms that the VC firm is planning investing and wishes to begin to finish due diligence and prepare definitive legal documents for investment.
Parties are able to sign the NDA because it is crucial for a startup company to secure their idea prior to it becomes tradable on the market.
Evaluation of the startup business
The value placed on the company is an important circumstance that both sides. The valuation is remarked as the pre-money valuation referring to the agreed-upon value of the business prior to the time capital is invested.
The valuation is subject to negotiation and doesn’t come with a specific formula or method to rely on. The lower the amount of dispersion an entrepreneur can expect to experience with a higher value and Visa-Versa.
The most important factors in determining valuation:
The experiences of the founders.
Size of market.
The proprietary technology was already created for the business.
Progress towards a worthwhile product.
The opportunity for recurring revenue of your business strategy.
The Capital efficiency of the business model.
Valuation of other similar companies.
The demand for the company is significant and the likelihood of getting investment from investors other than yours is possible.
Tax Implications on Venture Capital Funding
According to SEBI Guidelines, to avoided double taxation on the same stream of income of a pool that is not incorporated and, in turn, maintain a single taxation at the investor level. The Venture Capital Fund is a group of investors’ funds and is in the control of the investor and the fund should be considered to be a pass-through entity that is exempt from income tax.
For instance, if a Venture capital is investing in a food technology company (Zomato Private Limited) the tax will be paid by the venture capitalist. Thus, this says that Zomato is exempt from the Tax consequences.
Under the present regime, an income of a VCF is tax-deductible at fund level, and also taxable in the hand of the investor.
A feature of the Venture capital fund (VCF) in the field of food technology
The majority of the equity stocks for which funds are supplied by VCs are purchased by the VCFs.
VCFs also include experienced professionals and qualified people for the investment company to ensure efficiency.
The most significant benefit that VCFs have is the networking opportunities they provide. If the investor is well-known and wealthy the new company will achieve the speedy growth.
VCFs improves the quality of decisions-making capacity of the companies they are investing.
VC reduces the risk involved in the undertaking.
The disadvantages of Venture Capital
It is said that ” each coin comes with two sides” In the same way there are disadvantages with venture capital:
When an investor invests capital which has a huge amount , they are granted control of enterprises and due which the original founder losses the authority to make the final decision.
The process in obtaining venture capital is long and complicated.
This type of investment is not be a guarantee in the eyes of the Venture capitalist, and will be realized only in the long-term.
New consumer demographics that comprise young and skilled professionals are bringing a rise for this area of start-ups. The diversified sectors of the food-tech industry lead to an explosive growth rate of start-ups. Investors should research the segments for better investing opportunity and high return on investment.
The food technology industry is growing due to the an online delivery service that has been accumulated that is easy to use for a far broader consumer base. Successful examples are Swiggy, Zomato, Fassos etc. Market volatility can be a catalyst for an aggressive venture capitalist fight for and long-run benefits.
This is the way that supports this rapidly growing sector of economy and helps the Food- Tech Startups to satisfy the needs of consumer with the aid of help qualified individuals.