The Booster Shot

by Ruth D’Souza | Edited by Drishti Rana

In a world of ideas, creativity is a beacon but it does not stand alone. Even more important than coming up with an idea, is the funding that backs this idea. Innovation is nothing, if not backed with funds.

The source of backing ideation is not hard to find, but perhaps the most dynamic and elusive of these is Venture Capital. With the year of the Unicorn and the bloom of tremendous startups, Venture Capital is the buzzing source for young entrepreneurs  to fund their ideas. In the boom of ideation that could be a likely driver of innovation, Venture Capitalists provide startups with that booster shot that turns them into engines of economic growth.

A basic understanding

Venture capital in a general sense is a tool for financing companies in which wealthy investors invest their capital in ventures with a perspective of long term growth. An investment in venture capital functions somewhat like a mutual fund where investors commit their resources in privately held startups with the hopes to balance out returns and losses. Venture capital is a high risk investment. While some venture capitalists witness tremendous returns on their investments, others fail completely. If the companies go on to publicly traded entities, the VC receives tremendous returns which are split between investors and the VC in an 80:20 ratio. What makes venture capital particularly alluring to young entrepreneurs is that it is not a form of financing alone, but is accompanied by strategic mentoring and guidance. While it comes with speculation, the firms that turn out as runaway successes can be immensely profitable.

2021 witnessed a boon of debut investors in India. The wave of startups saw an all time high of venture capital flow in India with an inflow of  $19.5 billion till September. The months from July to September alone accounted for half the corpus with around 519 deals raising up to $9.9 billion.

The question in every mind is whether or not this boom is sustainable which relies entirely on the performance of this new generation of startups. If used wisely, these new attractions of VC towards India could be a turning point. Interacting with the economics behind it, it could remain the secret ingredient to turn India’s imitation economy into a successful innovation economy.

Economic Implications

Most firms that are born small, stay that way with little to no innovation. Only a handful of these are ones that engage actively in innovation and go on to become large businesses that contribute significantly to productivity and growth. Here is where Venture Capitalism comes in, providing a higher level of expertise than banks.

Venture Capital is a contributor to economic growth through 2 main channels. The first of these has to do with innovation. VC funds play a role in the introduction of new products and processes in the market. The second channel of contribution has to do with the capacity of knowledge in an economy. Solving the problem of underfunding, VC’s increase the absorption capacity of knowledge that research institutions generate. Venture capital affects the way that public and private research institutions function, potentially going further back in the pipeline of introducing new products, by actually playing a role in their development.

VC also contributes majorly to the employment growth more than any other investment sector.  In the US, venture investment makes up only 0.2% of the GDP but delivers an astonishing 21% of US GDP in the form of VC backed revenue.

India is amid it’s startup and coincidentally amid its VC boom. 2021 was something of a mega year for VC investments with startups across India rising four times to reach $28.8 billion.  These investments were across 8 sectors and e-commerce accounted for 31% of the overall VC investments.

Although the VC industry was bracing for a slowdown in 2022, the first month of this year itself witnessed record funding. An all time high level of investments of upto $3.5 billion across 130 deals was seen, the highest in a decade. This could pave the way for a strong financial year with growth trajectories implying the strongest investment year.

With the acceleration of startups, VC investments have thrived, causing an impact that works to usher in a new age of innovation. The impressive numbers are a testament to the fact that policy makers are beginning to realize its impact on the economy. Record investments are evidence of the role they play in the recovery needed in the aftermath of pandemic. Among the multitude of young firms in the economy, the ones that receive a backing in the form of venture capital are ones that show the most promise. Venture Capital goes beyond mere financing by displaying solidarity for innovation which is the very source of economic growth.

References

https://www.forbes.com/sites/kjartanrist/2021/07/28/vcs-outsized-economic-impact-will-power-a-new-golden-age/?sh=222bc07a3204

https://www.bloombergquint.com/business/indian-fintechs-raised-a-record-amount-of-venture-capital-funds-in-2021

https://www.gsb.stanford.edu/insights/how-much-does-venture-capital-drive-us-economy

https://deutschewealth.com/en/our_perspective/cio-specials/venture-capital-investing-closer-look.html

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