Imagine you have a brilliant app idea but zero money. Your family can't fund it, banks won't touch it (no collateral, no revenue), and the stock market isn't an option yet. This is where Venture Capital (VC) steps in — it's risk capital provided to early-stage, high-potential startups in exchange for an equity stake.
VC firms raise a fund (a pool of money) from institutional investors like pension funds, HNIs, and banks — these investors are called Limited Partners (LPs). The VC firm itself manages this fund as the General Partner (GP), typically charging a 2% annual management fee and taking 20% of profits (called 'carried interest' or 'carry') once a minimum return threshold (the hurdle rate, usually 8%) is crossed. This 2-and-20 structure is a favourite exam fact.
Startup financing happens in stages, and the stage determines who invests and at what valuation. Seed Stage — founders use personal savings, family money, or angel investors (wealthy individuals who invest their own money, typically ₹25 lakh to ₹2 crore). Series A / Early Stage — the startup has a working product and some users; a VC fund invests ₹5–₹50 crore for a meaningful equity stake, typically 20–40%. Series B / Growth Stage — the model is proven; larger VC or Private Equity (PE) firms invest to scale operations. Later Stage / Pre-IPO — growth equity rounds before a public listing.
The key valuation terms you must know: Pre-money valuation is what the startup is worth before new investment comes in. Post-money valuation = Pre-money valuation + New Investment. The investor's ownership % = New Investment ÷ Post-money valuation. VC funds exit via an IPO (going public), trade sale (selling to a strategic buyer like a larger company), or a secondary sale (selling their stake to another PE fund). In India, SEBI regulates VC funds under the AIF (Alternative Investment Fund) Regulations, 2012 — Category I AIFs include VCFs that invest in startups. This is asked frequently as a 4-mark theory question in Paper 6.