The fine line between venture capitalist and venture operating firms

Most companies start with a dream: the seed of an idea or a concept they believe has the potential to flower. And while hope, motivation, and some money seem like a promising foundation, often, it takes much more to grow into a booming company.

That’s where venture capital investments come into the picture. This is a golden time for the startup ecosystem in India as fundraising is booming. Venture capitalists today are key influencers in the startup world.

A venture capitalist firm refers to a group of investors who either offer capital to start-up ventures or support small companies that wish to expand, but do not have access to the equity market or the mainstream banking system. A VC firm generally doesn’t have funds of its own, but instead, raises funds from a set of wealthy individuals willing to take calculated risks in order to get a bang for their buck.

It invests in early-stage or unproven ventures that are perceived as high-risk by traditional sources of funding such as banks and capital markets. VCs look for a strong management team, a large potential market and a unique product or service with a strong competitive advantage. They also look for opportunities in industries that they are acquainted with, and the chance to own a large percentage of the company so they can influence its direction. To add to this, VCs also help a company merge with, or acquire other companies.

An understanding of how Union Square Ventures, a stalwart in the VC universe, operates will help establish the concept. Union Square Ventures has a star-studded portfolio, including Twitter, Tumblr and Coinbase. It banks on the strategy of investing in large networks of engaged users, differentiated by user experience, and amenable through the network effect.

A venture operating firm’s approach to the business of its investee firm is similar to that of a venture capitalist firm. Both pick minority stakes from a range of comparatively early-stage or mid-stage, high-risk ventures, and both offer strategic direction to them.

 The thin line between venture capitalist firms and venture operating firms is that the former is a passive partner, while the latter is an active partner.

Venture capitalist firms don’t participate much in the day-to-day operations of the investee firm, and the execution side of things, and instead, just infuse funds and have a say in macro decisions such as corporate strategy, next set of M&As, networking etc. They back companies that are in the early stages of development and poised for potential growth.

On the other hand, venture operating firms provide ground-level technical and managerial expertise to their investee firms in order to make them gain ground in the target geography through product localisation, communication localisation, local strategic partnerships, local talent sourcing, market intelligence and market-based strategic counselling.

In fact, some companies that partner with venture operating firms are mid to late-stage ventures and aren’t seeking capital at all, but only the expertise in all the aforementioned ways. 

Venture operating firms are suitable for global companies that are looking at market expansion into newer geographies. The overhead operating cost stays significantly under control, and the local expertise of the operating firm can hasten the market entry learning curve. This is particularly true for a market like India, which is complicated.

Here, they offer three broad advantages:

Understanding market insights

India’s complex market dynamics can often be challenging to comprehend, and hence having local expertise with a market vision can be a huge advantage.

Team of experts

Translating insights into action through a team of experts is crucial. A venture operating firm makes this possible by deploying a culturally imbibed team of experts to work dedicatedly and thoroughly with global teams.

Network strength

Having an extensive network of local partners specialising in various fields is an advantage for any global company entering India.

Venture operating firms enable faster and easier market entry, and the chances of success become much higher because of the local market expertise. It is a model which is about building a successful partnership between the investor and its investee firms.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)