Venture capital is one of the most frequently mentioned terms in the startup business world. Venture capital is a party that plays an important role in the development of a startup business, because most of the initial funding obtained by the company comes from venture capital. Venture capital is often considered as the “life holder” for a developing startup. Life here means the capital that will be used by the startup for greater expansion. This is because all startups need a lot of money at the beginning of their establishment to be able to expand more widely. So, what exactly is venture capital? What is its mechanism and role in a startup company’s business? Check out the full explanation below!
What is Venture Capital?
According to the Indonesia Stock Exchange (IDX), Venture Capital is an institution that provides funding to companies. In this case, Venture Capital (VC) can be said to be a party that invests in companies to help their ecosystem continue to grow. The majority of companies that receive funding through VC are startups or small companies that have great potential for the long term. So, where do venture capital funds come from? The source of VC funds comes from investors called limited partners. That is why venture capital is generally not owned by an individual, but a combination of several parties from investors, investment banks, and other financial institutions. If the startup in which the capital is invested experiences considerable success, then the VC will get equally large profits in the future.
What is the Role of Venture Capital for Business Advancement?
Here are some of the roles of venture capital for business continuity in startups, among others:
Saving Additional Capital
If KH Friend is starting a startup business, there are definitely many things that must be prepared, one of which is sufficient capital. Many startups are underdeveloped due to the limited capital needed. To be able to focus more on advancing the startup, KH pals can try to submit files to venture capital in order to provide appropriate capital. In addition, venture capital also plays a role in reserving the capital that has been provided, so that startup leaders can develop without the need to bother looking for additional funds from other parties.
Ensuring Company Profits
Investors in venture capital are those who have large amounts of funds and want these funds to be ‘rotated’ so that they can generate large profits as well. These investors usually expect to get high returns within a certain period of time that has been agreed upon with the company. That is why venture capital is also quite high risk.
Easy Access to Venture Capital Network
Capital is indeed a very important part for the sustainability of a startup, but there are other things that are no less important, one of which is easy access to venture capital networks or relationships. This ease of access is in the form of a network of clients and employees to use the services or products of the startup that KH Friend is running now.
Types of Venture Capital Funding
The types of funding that venture capital provides to startups can range from seed funding to ongoing funding. Here are some types of Venture Capital funding:
Seed Capital
This type of initial funding is when the startup is not yet organized and does not have a product. Usually the amount of funds provided tends to be small and aims for market research.
Startup Capital
This type of funding is for startups that already have a product. The capital or funds provided are usually useful for adding human resources (employees), conducting research, and completing products or services to market.
Early Stage
This type of funding is for startups that have developed and have good prospects for the next 2-3 years. Startups can utilize early stage funding to increase sales, productivity, and improve the efficiency of the startup.
Capital Expansion
This type of funding is given to startups that are already established and ready for major business expansion. Startups can use expansion capital to expand to cover new and larger markets or use it to maximize existing markets.
Late Stage Capital
A type of additional funding (additional capital) for startups that are already established and already have a giant valuation. Startups can use this type of funding as a late-stage fund to increase their capacity and increase the company’s capital.
How Venture Capital Works
How does venture capital fund startup companies? The following are the steps taken by VCs in organizing their funding:
- Investors give money to venture capital.
- VCs look for new startups and do business/work deals.
- If an agreement is reached, the fund manager then provides funding to the startup.
- During funding, the VC has the right to give advice, review the startup’s performance and participate in finding opportunities for profit.
- The VC also performs administrative, accounting, internal reporting, and IT tasks to control whether the funding provided also provides profit for the VC.
- Venture Capital will get a profit share of the capital funds that have been provided.
However, if the funded company is successful and is able to become an IPO/shareholding stock that goes public, or the company is acquired by a larger company, then the profit earned by the VC is greater.
How to Get Venture Capital Funding for a Business?
Now, you know what venture capital is, the types, how it works and its role for business. So, is your business interested in getting funding from venture capital? If so, check out some of the following tips and methods.
Make sure your business is in the form of a PT
Before you start looking for venture capital funding, make sure your startup business has been established as a Limited Liability Company (PT). Why PT? Because PT is the only business entity that is a legal entity and all of its capital is divided into shares, making it more credible and easier for investors to invest their capital. In return for the funds provided, investors will get shares in your startup company with a percentage of ownership equal to the funds provided. By owning shares in a PT, investors also have a position as the “owner” of the company.
Register your Intellectual Property Rights
If you want to get an injection of funds from venture capital, the thing that should not be overlooked is to take into account the protection of Intellectual Property. This is to prevent theft of innovations, works or creations of business people in the future. Intellectual Property can take various forms, ranging from copyrights, brands, patents, industrial designs, geographical indications, and so on. By registering it, you can obtain exclusive rights and protect it as a company asset that has economic value.
Submitting a Business Plan
The next way KH pals can attract venture capital is by submitting a business plan. This is important to do, because without a mature and appropriate business plan, it will be more difficult to get the desired capital. KH Buddy can pour various things in a business plan made in the form of a proposal or presentation, starting from information on what form of business will be run, to the amount of profit that will be obtained by investors.
READ ALSO: Here’s a Complete Guide and Business Plan Example for Beginners
That way venture capital will be interested in investing and will have more confidence in the potential success of your business.
Due Diligence
In general, due diligence is a moment where business people get the opportunity to meet face-to-face with investors. In other words, this moment is important for business people to introduce their business ideas directly and present well what the planned business looks like. Therefore, for companies that get the opportunity to do face-to-face, give the best appearance to be able to fully attract investors. So that later the goal of obtaining venture capital can run smoothly. In addition, don’t forget to prepare a variety of answers to as many questions as possible, because generally investors want to know in detail about the things in the business later.
Prepare Cooperation Agreement and Shareholders Agreement
In obtaining an injection of venture capital funds, of course there is an agreement that must be agreed upon by both parties. Generally, when investors have agreed to provide financing, a cooperation agreement will be made. Furthermore, KH Buddy can also make a shareholders agreement to regulate the authority of each shareholder, including investors. The shareholders agreement is also one of the documents that are usually needed or requested by investors when they want to invest in your startup company. Because this document will be a reference and evidence in the event of a dispute between shareholders.
KH Contact
For those of you who are currently developing a startup business, there is nothing wrong with getting additional capital from venture capital. Don’t forget to also take the time to know the various legal provisions that can help your business get an injection of funds from venture capital, starting from ensuring the formation of a PT legal entity to making contracts or agreements that can protect your business. To take care of it, you can contact Kontrak Hukum! With KH, you don’t need to be confused and bothered to take care of all startup business needs, because we provide PT establishment services and intellectual property registration that can be accessed on the KH Services – Starting a Business page. Well, when the business gets venture capital funding, KH pals can also make cooperation agreements and shareholder agreements with us through the KH Services – Contracts page. Very complete, right? Let’s make your startup business development easier with Kontrak Hukum! If you have any other questions, don’t hesitate to consult with us for free at Ask KH or via direct message (DM) to Instagram @kontrakhukum.
