This article is written by Aishwarya Chitodkar, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com.

Introduction

Venture capital is a successful tool over the past years. However, because of COVID-19, there is a downfall during this growth. However, the latest forecasts by the International Monetary Fund (IMF) expect a strong rebound in 2021 with growing returning to the long-term in the years 2022 to 2025. 

VCs invest only in idea’s that have the potential to in wider market with a high return on investment. 

In this era, the Venture capitalist is more beneficial to invest in food- tech startup as consumers are choosy about their health and food qualities. They are managing the hectic work schedule in a timely food diet. And this ease cannot come at the expense of quality. Nowadays people want to know what’s in their food, where does it come from, and how its production and sourcing impacts the environment. It is witnessed in the year 2020 that the food-tech industry are raised.

Why is it more important to have venture capital than Angel Investor?

Venture capitalists are commonly confused with angel investors, but in a bigger scenario they two different concepts. 

• Angel investor uses their own money to invest in small businesses, whereas a venture capitalist is an individual or firm that invests in small companies, generally using money pooled from investment companies, large corporations, and pension funds. Naturally, VCs do not use their private money to invest in companies. 
• Angels investors offer mainly financial assistance, whereas a venture capitalist seeks out a strong competitive product or service, and endowed management team, and a wide-ranging market.

Why startups seek out VC funding?

In a practical world, bankers do not offer startup loans as they offer any other successful businessman.

Banks have the rule to provide loans by checking the audited income statements, and balance sheets to determine whether a business qualifies for loan documents that aren’t as useful when determining an early-stage startup’s value. In the initial stages, the startups would provide an audited balance sheet and income statement. Whereas a registered or unregistered company have various assets as collateral to the loan provided by the banks, the assets mostly include machinery, land, laptops, furniture etc.

Venture capitalists have a view beyond the assets and liabilities such as market-size approximations, and the startup’s establishment team.

The above tools are not perfect, due to which most investments will drop their value. Yet, equity share dividends do not have the sealing limit, thus because of which the high risk of investing in startups is often defensible. The equity financing is arranged in such a way that it will beneficial to the investor in every other way.

Therefore, the equity financing of VCF has aided the startup environment well. Startups can accelerate growth without slowing right down to pay down debt, as they might with an old-style business loan, and VCs can capitalize on the rapid growth of startups upon their exits.

What Is Venture Capital?

Venture capital is a financing method for startups and an investment vehicle for institutional investors and wealthy individuals. In simple language, a startup venture that has the potential to grow, needs a certain amount of cash to grow. Investors or institutions like to invest their capital in such businesses with a long-term growth perspective. The person who invests is called a venture capitalist and the money involved is called venture capital fund.VC is governed by SEBI Act, 1992  and SEBI (Venture Capital Fund) Regulations, 1996.

What is meant by a food-tech venture? 

Food technology is a subset of food science that deals with the production, preservation, quality control and research and development of food products. It is governed by the Food Safety and Standard Authority of India (FSSAI). 

Process of Venture Capital 

“Better Capital leads pre-seed funding in food-tech firm Voosh”: Voosh Technologies Pvt Ltd, a food-tech firm, has raised an undisclosed sum as part of a pre-seed round of funding. So, it is possible to raise fund before the seed capital.

• Seed capital is an initial stage. At this stage, the startup may not have the final product yet, but they have an idea that how they are different from the other market players for convincing the potential investors of venture capital support.

1. At this stage, has a sample product available with a business plan and need funding for further product development, which is called as startup stage. The Venture use this funding for market research the determining the market size of the product and report it to the venture capitalist. 
2. The early stage is also called the “first stage,” this stage comes after the seed and startup stages. Mainly here, the product or service has been developed and is being used in the market. 
3. The Expansion Stage also commonly called the second or third stages, the expansion stage is when the company is keen-sighted exponential growth and needs additional funding to keep up with the demands. Here it comes up with the series investment of the venture capitalist. 
4. When a company reach its maturity level they take bridge funding. Funding which is obtained here is used to support activities like mergers, acquisitions, or IPOs. At this stage, often investors choose to sell their shares and end their relationship with the company, receiving a significant return on their investments. 

Documents between startup and VC

Stock purchase agreement

This agreement helps to maintain terms of purchase and conditions on the stock.

• Purchase price of the stock.
• Warranty and representations from of both the parties. 
• Conditions to closing.

Investors’ rights agreement

Provisions under this agreement give the investors’ rights, such as information rights. The Agreement outline how and which information about the company with the shareholders.

The provisions mentioned under this agreement can be used for subsequent funding rounds also, this agreement is concerned about the minority shareholders and their holding rights minority investors and the rights they hold.

This agreement often has details of the shares subscribed, such as the following:

• Clause of payment terms.
• Total number of shares and their different class.
• Warranties and representations about a company’s condition.

Term Sheet

• The term sheet is a nonbinding agreement between VCs and startups about the conditions of investing in the company.
• The term sheet is an initial document as it confirms that the VC firm is about to invest and wants to proceed to finalize due diligence and prepare definitive legal investment documents.

Non-disclosure Agreement

Parties may sign to NDA as it important for a startup company to protect their idea before it is tradable in the market. 

Valuation of the startup company 

The valuation placed on the business is an important situation for both parties. The valuation is remarked as the pre-money valuation referring to the agreed-upon value of the company before the capital is invested.

Valuation is negotiable and it doesn’t have one right formula or methodology to rely upon., The less dilution the entrepreneur will encounter when it has a higher valuation and Visa-Versa. 

The key factors for determining valuation:

1. The experience of the founders.
2. The size of the market.
3. The proprietary technology already developed by the company.
4. Progress towards a worthwhile product.
5. The recurring revenue opportunity of the business model.
6. The Capital efficiency of the business model. 
7. Valuation of other similar companies.
8. Whether the company demand is high and the probability of getting investment from other investors is highly possible.

Tax Implication on Venture capital Funding

1. As per SEBI Guidelines, to avoided double taxation of the same stream of income of an unincorporated pool and concomitantly maintained single tax at the investor level. A Venture Capital Fund is a pool of funds of investors and in the hands of the investor and the fund should be considered a pass-through entity and exempt under the income tax.
2. For example; If a Venture capital is investing in a food tech company (Zomato Private Limited) the Tax is payable by the Venture capitalist. Thus, this says that Zomato will be free from the Tax implications.
3. Under the present regime, an income of a VCF is taxable at the fund level, and also taxable in the hand of the investor.

Feature of Venture capital fund (VCF) in food Tech

• Often, the equity stocks for which the funds are provided by the VCs are purchased by the VCFs.
• VCFs also bring with them qualified individuals and skilled professional for the investment company for efficiency.
• The biggest advantage that VCFs offer is networking opportunities. If the investor is wealthy and well-known, the startup company will achieve the speedy growth. 
• VCFs improves the quality of decision-making power of the enterprises they are investing. 
• VC reduces the risk involved in the project. 

Disadvantages of Venture Capital

As it is said, “ every coin has its two sides”, the same manner there are disadvantages in venture capital: 

• When an investor invests its capital which has a huge amount gives them the control of enterprises and due which the original founder losses the maximum decision-making authority right.
• The process of acquiring venture capital is lengthy and difficult.
• This form of investment will not certain for the Venture capitalist and can be realized only in a long run.

Conclusion

New consumer demographics comprising young and skilled professionals are giving a rising curve to this sector of start-ups. The diversified sectors of the food-tech industry lead to the dynamic growth of the startups. Investors need to research the segments for better investing opportunity and high return on investment.

The food-tech industry is growing as a result of there’s associate accumulated online delivery service as ease to daily life far broader consumer base. Successful examples are Swiggy, Zomato, Fassos etc. Upswings of the market give a venture capitalist aggressive fight for and long-run benefits.

Thus the venture capital is the way that supports this emerging sector of the economy and encourages the Food- Tech Startups to meet the demands of the consumers with the help of help qualified individuals.

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