Venture Capital Investment and Market Risk - HDFC Life

Tech start-up receives 200 thousand dollars in series A funding or New start-up receives 1 million dollars in series B funding. How many times have you heard these Headlines on tech blogs and various newspapers? What is this funding? What do you mean by series A and series B? Why is a new company barely heard of getting so much money? Who is giving them so much money?

These new companies are not just some small shops being run by two kids in the back of their garage, these are companies that have caught the eye of someone who is a financial giant and who has seen what the company is doing or is impressed with its technology and new idea. On seeing that the company, if headed in the right direction with the right resources can one day make it big. Therefore, the investor is willing to invest in the early stages of the enterprise so that one day even he can reap the rewards once the company makes it big.

This type of investor is known as a venture capitalist. These venture capitalists invest in the early stages of new companies for a small share in the company and help them by providing money at regular intervals to run their day to day operations and make any purchases of new technology. These investors reap the rewards when a company is big enough to be a multimillion dollar corporation. They give money in stages known as series'. They are first given a small amount know as Seed Money, which is used to give a kick-start of sorts to get the company running, Then they receive money at regular intervals or when certain milestones are reached known as series A,B and C.

As a venture capital becomes a part of the company, it not only offers monetary support, but also mentorship in the form of managerial or technical expertise, becoming an integral part of the major decision making process of the company as well, hence a Venture Capital investment is not short of risk. Receiving below average returns or the project tanking in the market may be just a few of those which are not directly linked to the company's efforts. Market Risk is the risk of a loss due to factors that may affect the whole market or an asset class. It is also known as non-diversifiable risk as it affects all asset classes and is unpredictable.

A Venture Capitalist may evaluate different types of risk and then calculate whether to invest or not. They calculate market timing risk to see whether it is the right time to launch the product in the market or not, whether the business model is making sense and may be good enough to achieve profitability in the long run. They calculate the execution risk and whether or not the team is passionate enough and are getting together well to guarantee that the product execution is done right. These risks are important to be evaluated and to be taken care of for any Venture Capital Investor.

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